APR (Annual Percentage Rate)
The yearly cost of a loan expressed as a percentage, including the interest rate plus certain fees and points. APR is usually higher than the note rate and is the best single figure for comparing offers.
What does APR mean?
Two loans can share the same note rate yet cost very differently once points and lender fees are counted — and that is what APR captures. By rolling those upfront costs into a single yearly percentage, APR lets you compare offers on a like-for-like basis. It assumes you keep the loan to term, so if you expect to move or refinance early, weigh the upfront cost separately.
Rate vs. APR, worked out
Take a $400,000 loan at a 7.00% interest rate with $7,000 of finance charges — say, one point plus lender fees. The payment is based on the 7.00% rate: about $2,661 a month. But because you effectively received only $393,000 after those charges, the APR works out to about 7.18%.
What APR includes — and its blind spots
- Usually included: interest, discount points, origination and other lender fees, prepaid interest and mortgage insurance.
- Usually excluded: appraisal, credit report, title insurance and other third-party costs that would be paid in a cash deal too.
- APR assumes you keep the loan for its full term, so it understates the cost of upfront fees if you will sell or refinance in a few years.
- On an ARM, APR assumes the index stays where it is today — your real cost will follow the market.
Frequently asked
What is the difference between APR and interest rate?
The interest rate is the raw cost of borrowing the principal; APR adds points and certain lender fees on top and expresses the total as one yearly percentage.
APR is therefore usually higher, and it is the fairer figure for comparing two loans with different fees.
Is a lower APR always better?
Usually, but not if you will move soon. APR spreads upfront costs across the full term, so a loan with points can show a low APR yet cost more if you sell or refinance before those costs pay off. Compare the upfront cash as well as the APR.
Put it to use
APR Mortgage Calculator
Convert a rate plus points and fees into the true annual percentage rate (APR) of your mortgage.
Mortgage Calculator
Estimate your monthly principal-and-interest payment and see a full amortization schedule for any home loan.
Mortgage Points Calculator
Decide whether buying discount points to lower your rate pays off, and how long it takes.
Related terms
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