What Is Annual Percentage Rate (APR)?

Your APR reflects the true annual cost of your mortgage by bundling the interest rate with lender fees, discount points, and certain closing costs into one percentage. It is always equal to or higher than your base interest rate, making it the best single number for comparing loan offers side by side.

For example, a loan with a 6.75% interest rate and $4,000 in lender fees on a $350,000 mortgage might carry an APR of 6.95%. Another lender offering 6.50% with $8,000 in fees could have an APR of 6.85%. Comparing APRs reveals the second offer is cheaper overall despite higher fees, because the lower rate saves more over time.

Key Facts

• Always higher: APR is equal to or greater than the interest rate because it includes fees
• Required by law: The Truth in Lending Act (TILA) requires lenders to disclose the APR on every loan offer
• Included costs: Origination fees, discount points, and certain prepaid finance charges
• Excluded costs: Title insurance, appraisal fees, and homeowners insurance are not part of APR
• Best for comparison: Use APR to compare offers with different rate-and-fee combinations

Frequently Asked Questions

Why is my APR higher than my interest rate?

Your APR includes lender fees like origination charges and discount points on top of the base interest rate. The more fees your lender charges, the wider the gap between the two numbers. A large spread may signal high upfront costs.

Should I always pick the loan with the lowest APR?

Usually, but not always. APR assumes you keep the loan for its full term. If you plan to move or refinance within five to seven years, a slightly higher APR with lower upfront fees can cost less overall. Compare total costs based on your expected timeline.