The two numbers
The interest rate is the price of the money. It determines your monthly payment and nothing else. If you borrow $300,000 at 6.25% over 30 years, your payment is $1,847.15 whatever the fees are.
The annual percentage rate is the price of the deal. It folds the rate together with most of the costs of getting the loan and expresses the whole thing as a single annualised percentage. If the APR is higher than the rate — and it almost always is — the gap is the fees.
The mechanism is worth understanding: APR is calculated by taking the payment you will actually make and asking what rate would produce that payment on a smaller loan, one reduced by the fees you paid. You paid the fees, so effectively you borrowed less while repaying the same amount.
What goes into APR, and what does not
For US mortgages, APR generally includes:
- Origination and underwriting fees
- Discount points
- Mortgage broker compensation
- Mortgage insurance premiums
- Prepaid interest
And generally excludes:
- Title insurance and escrow fees
- Appraisal and credit report fees
- Recording fees and transfer taxes
- Home inspection
That second list matters. Two lenders can post an identical APR while one charges $1,800 more in excluded closing costs. APR narrows the comparison; it does not finish it.
The blind spot nobody mentions
APR assumes you keep the loan for its full term. Every fee is spread across all 360 payments.
You will probably not keep it for 30 years. Typical mortgage tenure is closer to seven, and shorter still in an active rate environment. When you sell or refinance early, the fees were spread over a term you never served — so the true cost was higher than the APR suggested.
The distortion runs in one direction and it is consistent: APR systematically flatters the loan with high fees and a low rate, because it assumes you will be around long enough to earn the rate discount back.
The correction is straightforward. Rather than trusting the single figure, compare total cost across the period you actually expect to hold the loan. The loan comparison calculator does this — it adds every payment plus fees, so the offer that front-loads its costs stops looking cheap.
Discount points
A point is 1% of the loan, paid up front to reduce the rate — typically by 0.25 percentage points, though it varies by lender and market.
On a $300,000 loan, one point costs $3,000 and might take the rate from 6.5% to 6.25%. That lowers the payment from $1,896.20 to $1,847.15, saving $49.05 a month. Break-even: $3,000 ÷ $49.05 = 61 months.
So points make sense if you are confident you will hold the loan more than about five years, and are a straightforward loss if you sell or refinance sooner. Points also lower the APR, which is precisely why an APR comparison alone can push you toward a loan that is wrong for a short holding period.
Comparing offers properly
A workable sequence:
- Line up the Loan Estimates. Every US lender must issue one on a standard form within three business days of application. Page 2 itemises fees; page 3 shows the APR and the five-year cost.
- Compare the same term and the same points. A 15-year quote against a 30-year quote is not a comparison. Neither is one-point against zero-point.
- Total the excluded fees separately. Title, escrow, appraisal, recording. APR ignores them; your bank account will not.
- Model your real holding period. Five to seven years is realistic for most buyers.
- Then look at APR as a cross-check, not as the verdict.
Where APR behaves differently
Credit cards
Card APR excludes fees entirely and is simply the annualised periodic rate. It also compounds, usually daily, so the amount you actually pay over a year — the effective rate — exceeds the stated APR. A 24% card carrying a balance costs closer to 27% in practice.
Auto loans
Dealer financing frequently quotes a payment rather than a rate, because the payment can be engineered by stretching the term. Always convert back to APR and total cost. Our auto loan calculator shows both.
Personal loans
Origination fees of 1–8% are common and are often deducted from the disbursement, so you receive less than you borrowed while repaying the full amount. APR captures this; the headline rate does not.
Three rules that hold up
- A large gap between rate and APR means large fees. Ask what they are and whether they are negotiable.
- A tiny gap on a high rate is still a high rate. Low fees do not rescue expensive money.
- If you expect to move or refinance within five years, weight the fees heavily and the rate lightly. This is the exact opposite of what APR encourages, and it is the right answer for a large share of borrowers.