What Is APR and How Does It Work for Mortgages?

You may have heard people use the terms APR and interest rate interchangeably, but they aren’t the same thing — and it’s important to know the difference.

What is the APR on a mortgage? APR stands for annual percentage rate and represents how much it costs per year to borrow the principal on a mortgage. In addition to the interest rate your mortgage lender charges, APR includes loan costs such as lender fees and discount points.

Interest Rate vs. APR

The interest rate is the amount you pay to borrow the principal. The APR includes points, most closing costs, and other charges or fees, in addition to the interest rate. As a result, the APR shows a more complete picture of a loan’s costs and is represented by a number that’s greater than the interest rate.

How Does APR Work for a Mortgage?

APR is represented as a percentage rate and usually includes:

• Your loan’s interest rate.
• Broker fees.
• Origination fees.
• Transaction fees.
• Discount points.
• Mortgage insurance.

What Factors Affect APR?

The APR will vary according to the specific fees that the lender charges, whether you buy discount points, and your loan’s interest rate, which is expressed as a percentage rate and affected by several factors, such as:

• Your credit score.
• Your down payment.
• Your loan term.
• Your loan amount.
• Your loan type.
• The federal funds rate.
• Your location.

Where To Find a Loan’s APR

The APR is listed on Page 3 of your loan estimate, which is a standardized form you receive from the lender within three business days of applying for a mortgage.

What APR Should I Get for a Mortgage?

In general, the lower your APR, the less you’ll need to pay for your loan.

However, APR is partly determined by several factors outside of your control, such as the current prime interest rate. If market interest rates are high, then you can expect a higher APR.

Keep in mind that having a good credit history and shopping around with different mortgage lenders can help you get the lowest available APR.

APR Comparison

APR helps you compare loan costs. Take a look at this example for buying a $400,000 home with a 30-year fixed-rate mortgage and a down payment of 20%:

Loan B has a higher interest rate and includes 1 discount point, which gives it a higher APR than Loan A. As a result, Loan B has a higher monthly payment, and will cost more in total interest paid and overall.

It’s important to consider how long you expect to keep the loan. If you intend to keep it for the entire term, then Loan B will cost you $72,263.69 more than Loan A. However, if you expect to sell the home or refinance your mortgage in a few years, the cost difference could be much less.

FAQ: APR for Mortgages

Here are the answers to some frequently asked questions about what APR is on a mortgage.

How do you avoid high APR?

Some of the factors that influence the APR you’re offered are outside of your control, such as the prime interest rate and the fees your lender charges. But you can control a few factors that influence your interest rate, which makes up a big part of your APR. Having a higher credit score and making a larger down payment are two common ways to secure a lower interest rate.

Is it better to have a lower interest rate or APR?

It’s always good to get a lower interest rate, which is a major factor in your APR.

When you’re comparing loan options, you should keep in mind that the APR gives you a fuller picture of the cost of a loan than the interest rate alone. For example, two loans could have similar interest rates, but one could have a higher APR. This is because one of those lenders charges more for closing costs and fees.

Do I get charged APR every month?

While you don’t pay APR every month, you do pay your mortgage every month, and APR is a useful tool for understanding the full cost of your home loan.