Watch: APR explained by Ava
A 42-second guide to understanding APR and comparing loan offers.
Read the video transcript
What is APR? It stands for annual percentage rate. Your interest rate is the cost of borrowing the loan principal. APR is broader: it includes interest and certain loan costs, expressed as a yearly rate. That’s why two loans with the same interest rate can have different APRs.
Compare similar loan types and terms. APR doesn’t include every expense, and how long you keep the loan matters, too. On your Loan Estimate, find the interest rate on page one, and APR on page three, under Comparisons.
Still have questions? Ask Ava, or connect with a licensed loan officer. Keep learning with TouchPoint Mortgage.
Interest rate vs APR
Your interest rate is the cost of borrowing the loan principal. Your APR is the total cost of the loan, including interest plus most closing costs (origination fee, discount points, mortgage insurance, certain other charges), expressed as a yearly rate.
If you are comparing two loan offers, APR is the better number. A loan with a 6.50% rate and $4,000 in closing costs may have an APR of 6.75%. A loan with a 6.50% rate and $0 in closing costs has an APR of 6.50%. The first loan is more expensive, even though the rate looks the same.
What APR does NOT include
APR is not perfect. It typically does not include:
- Title insurance
- Notary fees
- Home appraisal
- Credit report fees
- Some application fees that vary by state
For a true apples-to-apples comparison, ask for a Loan Estimate from each lender. The Loan Estimate standardizes all closing costs and is the single best document for comparing offers.
The bottom line
When shopping for a mortgage, compare APRs, not interest rates. A slightly higher rate with no closing costs can beat a lower rate with high closing costs, depending on how long you stay in the loan.
Talk to a real person
Still have questions? A licensed loan officer from TouchPoint will answer in plain English. No scripts, no runaround.