APR (Annual Percentage Rate) represents the true annual cost of borrowing including the interest rate plus certain fees. It is always higher than the interest rate.
APR includes: the interest rate origination fees discount points and certain closing costs like title fees and appraisal. It does NOT include property taxes insurance HOA dues or prepaids.
APR is the best single number for comparing loan offers because it accounts for both the rate and the fees.
What Is Included
Included in APR: interest rate origination fees (Section A), discount points, mortgage insurance premiums, and certain closing costs like title insurance and appraisal fees if paid to the lender. These are spread across the loan term in the APR calculation.
What Is Excluded
Not included: property taxes, homeowner's insurance, flood insurance, HOA dues, prepaid interest, and escrow deposits. These costs are the same regardless of which lender you choose so they are not part of APR comparison.
How It Is Calculated
APR is calculated by taking the total loan costs (interest + fees) and expressing them as a yearly rate. The math spreads fees across the expected loan term. A 30-year loan with ,000 in fees adds about 0.2-0.3% to the APR.
Why It Is Higher
APR is always higher than the interest rate because it includes fees. The difference between rate and APR shows how much in fees you are paying. A smaller gap means fewer fees. A larger gap means more fees.
Comparison Value
APR is the best single number for comparing loans. Compare APR across lenders to find the lowest overall cost. However APR assumes you keep the loan for the full term which may not be accurate if you sell or refinance early.
Limitations
APR limitations: it assumes you keep the loan for the full term. For short-term borrowers APR may overstate the cost of upfront fees. For these cases compare total closing costs and monthly payment instead.