Your mortgage APR is a percentage that represents how much you'll pay in interest and fees each year

Your mortgage APR is a percentage that represents how much you'll pay in interest and fees each year

January 2, 2021

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  • Your mortgage annual percentage rate (APR) is different than your mortgage interest rate.
  • The APR gives you a more accurate sense of what you'll pay each year by rolling the interest rate, discount points, and other fees into one percentage.
  • It's possible for a mortgage lender to charge a higher rate and lower fees than another lender and still offer a better APR.
  • Mortgage lenders are required to tell you the APR along with the interest rate when you get a mortgage.
  • Policygenius can help you compare homeowner's insurance policies to find the right coverage for you, at the right price »

Mortgage APR vs. mortgage interest rate

When looking at your mortgage documents, you'll see two percentages pop up: the interest rate and annual percentage rate (APR). These are two distinct percentages, and it's important to know the difference.

Your interest rate is the fee the lender charges you for borrowing money, expressed as a percentage such as 3.75%. Along with your mortgage principal, you'll pay interest each month.

The APR is the interest rate plus the costs of things like discount points and fees. This number is higher than the interest rate and is a more accurate representation of what you'll actually pay on your mortgage annually.

Why is it important to understand the difference between the interest rate and APR? When you're shopping around for lenders, you may find that one charges a lower interest rate, so you think that company is the obvious choice. But you might actually find out the APR is higher than what you can get with another lender because it charges hefty fees. In reality, it might not be the best deal.

What's included in an APR?

Here are the costs you can expect to be represented in your APR:

  • Interest rate
  • Discount points: You can pay a fee at closing for a lower interest rate on your mortgage. One discount point usually costs $2,000, and it reduces your rate by 0.25%. So if your rate is 3.5% and you pay $4,000 for two discount points, your new interest rate is 3%.
  • Mortgage insurance
  • Origination fee
  • Mortgage fee
  • Underwriting fee
  • Loan processing fee
  • Escrow fee
  • Legal fees

Although the APR gives you a better idea of what you'll pay on your mortgage than the interest rate, a lender doesn't include all fees in your APR. Here are some fees that usually aren't reflected in the APR:

  • Title examination and insurance fees
  • Notary fees
  • Attorney fees
  • Credit report fees
  • Inspection fees
  • Appraisal fees
  • Recording fee
  • Property survey fees

Ask your lender for an itemized list of fees so you can know what you're paying, both toward the APR and toward other fees.

Mortgage APR example

Let's look at two hypothetical 30-year fixed-rate mortgages that charge different interest rates and fees.

Mortgage A charges a 3.5% rate. Mortgage B charges a 3.25% rate, but you pay $2,000 for a discount point, lowering the rate to 3%.

Mortgage A comes with a higher rate but lower fees. Mortgage B comes with a lower rate but higher fees. Which one has the better APR?

 Mortgage AMortgage B
Interest rate3.5%3%
Origination fee$1,000$2,000
Other closing costs$4,000$10,000
Discount pointsNone$2,000

Even though Mortgage B has higher fees, its rate is low enough to make it a better deal than Mortgage A. 

This doesn't mean every mortgage with a lower rate will have a better APR than one with a higher rate. It depends on how drastic the differences in interest rates and fees are from one lender to the next.

A lender is legally required to tell you the APR of your mortgage, not just the interest rate. If you're still searching for the right lender, request a list of fees from each one to get a good idea of which one will offer the best APR.

Laura Grace Tarpley is the associate editor of banking and mortgages at Personal Finance Insider, covering mortgages, refinancing, bank accounts, and bank reviews.

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