APR Against the Interest Rate
The interest rate determines your monthly payment. The APR determines what the loan actually costs, because it spreads the fees over the term and re-expresses the whole thing as a single annual rate. Two loans can carry the same rate and very different APRs.
The mechanism: fees are subtracted from what you receive but not from what you repay. Borrowing $320,000 while paying $6,200 in fees means receiving $313,800 and repaying as though you had $320,000. The APR is the rate that makes those two facts consistent.
Why It Exists
The Truth in Lending Act requires U.S. lenders to disclose APR precisely so that quoted rates cannot be gamed with fees. Without it, a lender could advertise 5.99% while charging four points and appear cheaper than an honest 6.5% with no fees.
What Goes Into APR on a Mortgage
Included: discount points, origination and underwriting fees, mortgage broker compensation, prepaid interest, and mortgage insurance premiums. Excluded: appraisal, title insurance, credit report, home inspection, recording fees, and escrow deposits — costs paid to third parties rather than the lender.
This is why the APR never captures the full cost of closing. Two lenders can quote identical APRs while their total cash-to-close differs by thousands.
The Break-Even Problem With APR
APR assumes you keep the loan for its entire term. Almost nobody does — the median U.S. mortgage is refinanced or repaid within about eight years. Because APR amortises fees across thirty years, it systematically flatters loans with high fees and low rates.
| Option | Rate | Fees | Payment | APR | Cheaper if you stay |
|---|---|---|---|---|---|
| A: no points | 6.75% | $1,800 | $2,076 | 6.805% | Under 5 years |
| B: one point | 6.50% | $5,000 | $2,023 | 6.652% | Over 5 years |
The correct question is not which APR is lower but how long you will hold the loan. Dividing the extra fee by the monthly saving gives the break-even month directly.
APR on Credit Cards Is Different
Credit card APR is simply the annualized periodic rate with no fees folded in, because there is no fixed term to amortise them over. The effective cost is higher than the stated APR because interest compounds daily: a 24% card compounds to roughly 27.1% a year on a carried balance.
Frequently Asked Questions
Should I always choose the lower APR?
Only if you will hold the loan long enough for the fee difference to pay back. For short holding periods, the lower-fee option usually wins even at a higher APR.
Are discount points worth buying?
One point typically costs 1% of the loan and lowers the rate by about 0.25%, breaking even in roughly five to seven years. Worth it for a long stay, wasteful for a short one.
Why is my APR higher than the rate I was quoted?
Because fees are included. A gap of 0.1–0.3 percentage points is normal on a mortgage; anything wider signals heavy fees worth questioning line by line.