What Is APR (Annual Percentage Rate)?

Short answer

APR is the yearly cost of your mortgage including the interest rate plus certain lender fees, points and mortgage insurance, spread over the loan term. If two loans both quote 6.5% but one has $8,000 in fees and the other $2,000, the first will show a higher APR. It appears on page 3 of your Loan Estimate.

Definition

The annual percentage rate (APR) is a standardized number required by federal Truth in Lending rules that combines the interest rate with prepaid finance charges so borrowers can compare offers. It is always equal to or higher than the note rate.

Worked example

Loan A: $400,000, 30 years, rate 6.50%, lender fees $2,500. Loan B: same loan, rate 6.25%, but 1.5 points ($6,000) plus $2,500 in fees. Loan B's monthly payment is about $62 lower. But you paid $6,000 extra up front. $6,000 / $62 = about 97 months, so roughly 8 years to break even. The APR on Loan B will be closer to Loan A's than the 0.25% rate gap suggests, because APR counts the points. If you plan to sell or refinance within 8 years, Loan A is cheaper. These are illustration numbers only; rates vary daily.

What APR includes and excludes

• Included: interest, discount points, origination fees, underwriting and processing fees, mortgage insurance, prepaid interest.
• Excluded: title insurance, appraisal, credit report, recording fees, Florida doc stamps and intangible tax, homeowners insurance, escrow deposits.

Because the excluded items are large in Florida, always read the total closing costs on the Loan Estimate alongside the APR.

How to use APR when comparing

Compare APR only between loans of the same type and term, locked on the same day. A 30-year fixed and a 7-year ARM are not comparable by APR. Ask each lender for a Loan Estimate and line up Section A (origination charges) and the APR. A broker does this across 100+ lenders for you.

In South Florida

APR does not include Florida's documentary stamp tax or intangible tax, title insurance, the appraisal, recording fees or the condo questionnaire fee, so two Miami Loan Estimates can show the same APR with very different cash-to-close figures. South Florida buyers who hold condos a few years and move often get more value from a lower-fee loan than from a lower rate bought with points.