What Is APR?
APR (annual percentage rate) is the yearly cost of a loan including the interest rate and certain lender charges, such as discount points and origination fees. It is used when comparing loan offers of the same type and term, and matters because two loans with the same rate can cost very different amounts.
APR in plain English
The interest rate sets your monthly payment. APR adds the lender's upfront charges - such as points and origination fees - and expresses the total as one yearly rate.
If two lenders quote the same rate but one charges more fees, that loan has the higher APR. That is what makes APR useful for comparison.
Advanced explanation
APR expresses the cost of credit as a yearly rate that includes the note rate plus certain finance charges (for example points and some lender fees), as defined for disclosure under the Truth in Lending Act (Regulation Z). Because those charges are spread over the full loan term, APR comparisons assume the loan is kept to maturity; it is not the rate used to compute the monthly payment.
Third-party charges such as the appraisal, title insurance and recording fees are generally not finance charges, so they are not in the APR even though you pay them. Comparing total closing costs on each Loan Estimate catches what APR leaves out.
Worked example
APR with one point and lender fees
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Loan
- $300,000 at 6.500%, 30 years
- Discount points
- 1 point ($3,000)
- Origination and underwriting fees
- $1,200 and $800
- Appraisal and title (third-party)
- $650 and $2,100
| Step | Calculation | Result |
|---|---|---|
| 1. Monthly principal and interest | $300,000 at 6.500% over 360 months | $1,896.20 |
| 2. Prepaid finance charges (points and lender fees) | $3,000 + $1,200 + $800 | $5,000 |
| 3. Amount financed | $300,000 − $5,000 | $295,000 |
| 4. APR: the rate at which the payments repay the amount financed | solve for the rate that discounts 360 payments of $1,896.20 to $295,000 | 6.662% |
APR: 6.662%. The fees add about 0.16 percentage points to the 6.500% note rate. The appraisal and title charges are real costs but, as third-party charges, are not counted in the APR.
What this calculation leaves out
- APR assumes you keep the loan for the full term. If you sell or refinance early, upfront fees cost more per year than the APR suggests.
- Compare APRs only for loans of the same type and term, from Loan Estimates issued the same day.
- Your payment is calculated from the note rate, not the APR.
Try it: APR with your own numbers
Interactive and illustrative: change any value and the results update instantly in your browser. The figures come from the same engines as REAIXO's full calculators.
APR vs interest rate
The interest rate sets the payment. The APR spreads lender charges over the loan, so it is the better number for comparing offers.
- Interest rate
- 6.500%
- Payment $1,896 a month
- APR
- 6.662%
- 0.162 points above the rate
- Finance charges in the APR
- $5,000
- $2,750 of third-party fees excluded
Formula
APR = the rate at which the payments’ present value equals the amount financedAmount financed = Loan − Points − Lender feesAssumptions
- Regulation Z actuarial method, fixed-rate loan held to term.
- Appraisal and title fees are third-party charges not counted as finance charges here.
- If you sell or refinance early, the real cost of upfront fees is higher than the APR suggests.
Why it matters
Two loans with the same interest rate can have very different APRs depending on fees, so APR is often a better way to compare offers than rate alone.
APR reveals fees hidden behind a low rate. On a $300,000 loan, $5,000 of points and lender fees raises a 6.5% rate to an APR of about 6.66% - the same as paying a noticeably higher rate with no fees, if you keep the loan for its full term.
What it means for you
What buyers should know
Compare Loan Estimates issued on the same day for the same loan type, term and lock period; rates change daily.
Common mistakes
- Choosing the lowest APR when you expect to sell or refinance within a few years - upfront fees then cost more per year than APR shows.
- Comparing APRs for different loan types or terms.
- Expecting the payment to be calculated at the APR; it is calculated at the note rate.
Interest Rate vs. APR
The cost of borrowing the principal, expressed as a yearly percentage — used to calculate your monthly principal-and-interest payment.
A broader annualized borrowing cost that folds in certain lender fees and closing costs on top of the interest rate — usually a bit higher than the rate itself.
APR is generally the better number for comparing total loan cost across lenders, since it accounts for fees the interest rate alone doesn't.
Full comparison: Interest Rate vs APR, with a worked example →
APR: frequently asked questions
Why is APR higher than the interest rate?
Because APR adds certain upfront finance charges, such as points and lender fees, to the interest. A loan with no such charges would have an APR equal to its rate.
Should I compare loans by APR or interest rate?
Use both, because each answers a different question. APR is better for comparing the total cost of loans of the same type and term kept for the full term; the rate and the total closing costs matter more if you will refinance or sell early.
What fees are included in APR?
Finance charges defined by Regulation Z, such as discount points, origination and underwriting fees, prepaid interest and some mortgage insurance. Most third-party charges, such as appraisal and title fees, are excluded.
Is a lower APR always better?
Not always. A loan with a lower APR may have higher upfront costs that only pay off if you keep it long enough, so check the break-even point.
Go deeper
Recommended calculators
Run APR with your own numbers:
Where it fits
- Buying a home, Search & Affordability: before this, Interest Rate; next stage, Preapproval: Pre-Qualification.
More Financing Terms
Recommended next step
Enter the fees from your Loan Estimate and see the true cost over the time you expect to keep the loan.
Mortgage APR calculator →Apply it to a specific property: Closing cost analysis.
Sources and review
- What is the difference between a mortgage interest rate and an APR?, Consumer Financial Protection Bureau. Supports: APR includes the interest rate plus points, broker fees and other charges, so it is usually higher than the rate.
- 12 CFR 1026.22 - Determination of annual percentage rate (Regulation Z), Consumer Financial Protection Bureau. Supports: How the annual percentage rate is determined under Regulation Z.
- Loan Estimate explainer, Consumer Financial Protection Bureau. Supports: Where APR and loan costs appear on the Loan Estimate.
Where this applies: United States. Federal disclosure rules apply nationwide; loan-program limits are set by each program (Fannie Mae shown) and individual lenders may be stricter.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
Related Questions
Continue Learning
Understand a property's costs and risks before you make an offer
Use the free calculator for your own numbers, or analyze a specific home before you commit.
- Free calculatorMortgage Rate Comparison Calculator →Runs in your browser; nothing to sign up for.
- Paid reportHome Buyer Decision Report →Evaluate a home before making an offer. Price shown before checkout.
Or analyze a specific property: Essential Property Analysis, $19 · Property Decision Analysis, $49 · Professional Property Analysis, $99. You choose the depth before you pay.