Annual Percentage Rate (APR)

What Is the Annual Percentage Rate?

The annual percentage rate (APR) is the true yearly cost of a loan expressed as a percentage. Unlike the interest rate (also called the note rate), APR includes lender fees and certain other charges, spreading them over the loan term to produce a single number that represents the all-in cost of borrowing.

APR was standardized by the Truth in Lending Act (TILA) specifically to give borrowers a single, comparable figure when shopping multiple lenders. A lender advertising a low interest rate with high fees may have a higher APR than a lender with a slightly higher rate but lower fees — and APR will reveal that difference.

What APR includes (finance charges)

• Origination fees and points
• Discount points paid to buy down the rate
• Underwriting and processing fees charged by the lender
• Mortgage broker fees
• Required mortgage insurance premiums (FHA MIP, PMI on certain loans)
• Prepaid interest (from closing to the first payment)

What APR does not include

• Title insurance and title search fees
• Appraisal fees
• Attorney or settlement fees
• Recording fees
• Prepaid homeowners insurance and property taxes
• Home inspection fees

APR vs. Interest Rate: Side-by-Side

Consider two lenders offering the same $350,000 30-year refinance loan. The one with the lower rate charges more in origination fees, making the APR worse overall.

Lender A has the lower rate but a worse APR. If you hold this loan long-term, Lender B is cheaper in total — the APR comparison reveals what the headline rate hides.

When APR Is Useful — and When It Misleads

APR is most useful when:

• You plan to keep the loan for most or all of its term (7+ years)
• You want a single number to compare two lenders on the same loan type
• You're choosing between paying points vs. no-points options on the same loan

APR can mislead when:

• You're doing a short-term hold — APR spreads fees over 30 years, so high upfront fees look smaller than they are if you'll sell or refinance in 3–5 years. Use the break-even calculation instead.
• Comparing different loan terms — a 15-year APR vs. a 30-year APR is not an apples-to-apples comparison because fees are amortized over different periods.
• Comparing ARM vs. fixed loans — ARM APRs are calculated using the initial rate and assume it stays fixed, which often understates the long-term cost.

Frequently Asked Questions

What is the difference between APR and interest rate?

The interest rate determines your monthly payment — it's the rate at which interest accrues on your balance. APR is higher because it adds lender fees (origination, discount points, processing) spread over the loan term. The gap between your rate and APR reflects how much you're paying in lender fees.

Should I choose the lower APR or lower interest rate?

For long holds (7+ years), choose the lower APR. For short holds (under 3–5 years), compare break-even points — a slightly higher rate with lower fees may cost less overall if you won't stay long enough to recoup the cost of points.

Why is my APR higher than my interest rate?

Because APR includes origination fees, discount points, underwriting fees, and broker fees that your monthly payment does not reflect. The further apart they are, the more lender fees you're paying. A gap of 0.5% or more typically signals significant origination or discount point charges.

What fees are included in APR?

Lender-side fees: origination charges, discount points, underwriting, processing, broker fees, required mortgage insurance, and prepaid interest. Third-party costs — title, appraisal, attorney, recording, and insurance escrow — are excluded from APR.

Other Glossary Terms