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: 30-Year Fixed-Rate Loan for a $400,000 Home
|Loan A||Loan B|
|Other lender fees||$5,000||$5,000|
|Total interest paid||$298,418.51||$370,682.20|
|Total cost of the loan||$623,418.51||$695,682.20|
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.