APR vs interest rate
The interest rate is the yearly cost of borrowing the loan amount, as a percentage. It doesn't reflect fees. The APR is a broader measure: for a mortgage it reflects the interest rate, any points, mortgage broker fees and other charges you pay to get the loan. On a Loan Estimate, the rate is on page 1 under "Loan Terms" and the APR is on page 3 under "Comparisons".
What fees are included in a mortgage APR?
APR is built from the "finance charge" defined in Regulation Z (12 CFR 1026.4): charges you pay as a condition of getting credit.
| Usually included | Excluded on a mortgage (if bona fide and reasonable) |
|---|---|
| Interest | Title examination, abstract and title insurance |
| Points and loan fees | Property survey |
| Mortgage broker fees | Preparing the deed, mortgage and settlement documents |
| Mortgage insurance protecting the lender | Notary and credit report fees |
| Other charges the lender requires to make the loan | Appraisal and pre-closing inspection fees |
| Amounts paid into escrow for taxes and insurance | |
| Application fees charged to all applicants |
So two loans with the same rate can have different APRs, and a loan with a lower rate but large points can have a higher APR.
How do you calculate APR for a mortgage?
APR is the rate that makes the loan's payments equal the money you actually get after finance charges.
- Work out the monthly payment on the full loan at the note rate.
- Subtract the finance charges from the loan amount to get the "amount financed".
- Find the rate at which that same payment would exactly repay the amount financed. That rate is the APR.
Example: a $300,000, 30-year loan at 6.5% has a payment of $1,896.20. With $6,000 of finance charges, the amount financed is $294,000. The rate at which $1,896.20 a month repays $294,000 over 30 years is about 6.70%. That's the APR. Step 3 needs trial and error, so use the APR calculator.
Caveats for mortgage APR
- The APR assumes you keep the loan for its full term. Fees spread over fewer years cost more per year, so if you'll sell or refinance early, the true cost is higher than the APR suggests.
- On an adjustable-rate loan, the APR doesn't show the maximum rate you could pay.
- A HELOC's APR doesn't include fees, so it isn't comparable with a closed-end loan's APR.
Credit card APR vs mortgage APR
For a credit card, the interest rate is usually stated as an annual rate, the APR, so the two terms mean the same thing. Many issuers charge interest daily using a daily periodic rate: the APR divided by 365 or 360, applied to each day's balance, with that interest added to the next day's balance.
Example: 24% ÷ 365 = 0.0658% a day
Most cards don't charge interest on purchases if you pay the full balance by the due date each month.
What does "annual APR" mean?
APR is already annual, so "annual APR" just means the APR. To compare it with a savings rate, note that APR doesn't include compounding; APY does. See interest on $1 million for APY in action, or compare loans with the loan calculator and mortgage calculator.
Sources: CFPB: mortgage interest rate vs APR; 12 CFR 1026.4 (Regulation Z finance charge); CFPB: credit card APR; CFPB: daily periodic rate.
Every worked example on this page was checked with Calcist's own engine and an independent reference.