Definition
Annual percentage rate (APR)
The annual percentage rate (APR) is the yearly cost of a loan expressed as a single percentage that includes the interest rate plus certain finance charges, such as origination fees and discount points. Lenders must disclose it, which makes APR a useful way to compare offers whose rates and fees differ.
The note rate determines the monthly payment. APR adds the cost of prepaid finance charges by treating them as if they were spread over the life of the loan. Because those charges reduce the amount actually financed, APR is almost always higher than the note rate when fees are paid.
Worked example. Two lenders offer a $300,000, 30-year loan. Lender A quotes 6.5% with $2,000 in finance charges. Lender B quotes 6.25% but charges $8,000, including points. Lender B's payment is lower, yet once fees are counted the two APRs end up much closer than the note rates suggest. The borrower's choice depends on how long they expect to keep the loan; that is a break-even question, not just an APR question.
APR has limits. It assumes the loan is held to maturity, so it overstates the cost of upfront fees for someone who refinances or sells in a few years. For adjustable-rate mortgages, APR depends on assumptions about future rates. It also excludes some closing costs, such as certain third-party charges. The Loan Estimate shows APR on page three. The APR vs. interest rate calculator shows how fees move the gap.
Calculators that use this term
FAQ · 2 questions
Questions about Annual percentage rate (APR)
Should I compare mortgages by APR or interest rate?
Use both. The rate drives your payment; APR folds in certain fees so you can compare total cost. If you expect to sell or refinance soon, upfront fees matter more than APR suggests.
Why is my APR higher than my interest rate?
Because APR includes finance charges such as origination fees and points. Those charges increase the effective cost of borrowing, so APR sits above the note rate.
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