APR, short for annual percentage rate, is the yearly cost of a mortgage expressed as one percentage. It starts with the interest rate and adds the finance charges you pay to get the loan, such as discount points, lender fees and mortgage insurance. The interest rate sets your payment, and the APR lets you compare two offers that carry different fees.
What APR includes and what it leaves out
Federal Truth in Lending rules (Regulation Z) decide what counts as a finance charge.
Counted in the APR:
- Interest, including prepaid interest from closing to the end of the month
- Discount points and lender origination fees
- Mortgage broker fees
- Mortgage insurance, including FHA's upfront and annual premiums and Conventional PMI
Left out on a home purchase:
- Title insurance and title examination
- Appraisal and credit report fees
- Recording fees
- Deposits into your escrow account for taxes and insurance
Your Loan Estimate shows the interest rate on page 1 and the APR on page 3, under Comparisons.
Two offers on a $300,000 loan
| Offer A | Offer B | |
|---|---|---|
| Interest rate | 5.75% | 5.875% |
| Finance charges at closing | $4,500 | $1,000 |
| Principal and interest | $1,750.72 | $1,774.61 |
| APR | 5.889% | 5.906% |
Offer A costs $3,500 more at closing and saves $23.89 a month. Its lower APR marks it as the cheaper loan if you keep it for all 30 years. The break-even is about 147 months ($3,500 ÷ $23.89), a little over 12 years, so a buyer who expects to sell or refinance before then spends less overall with Offer B even though its APR is higher. APR assumes you keep the loan to the end, which is why it works best alongside the break-even.
Why FHA APRs run above the rate
Mortgage insurance counts as a finance charge. FHA's 1.75% upfront premium and its annual MIP both go into the APR, so an FHA loan's APR sits well above its note rate even with zero points. Conventional PMI raises the APR the same way for as long as it's on the loan. That gap reflects the insurance and says nothing about the lender's pricing, so compare an FHA offer with other FHA offers and a Conventional offer with other Conventional offers.
Bring any Loan Estimate you've received and call AAA Capital Funding at 888-601-8344; we'll line it up against ours fee by fee. The mortgage payment calculator shows the monthly side of the same loan.