APR vs Interest Rate – [ Fees, Calculations and Examples ]

If you’re in the process of getting a mortgage you might notice that your lender lists the interest rate and the APR. You might think to yourself: What’s the difference between the APR and the interest rate? It’s important to understand these two rates and how they pertain to your mortgage as they are not the same.


  • The interest rate is the cost to borrow over a period of time expressed as a percentage 
  • The APR includes your interest rate + additional fees and costs associated with your mortgage
  • The APR is always higher than the interest rate 

What is the Interest Rate?

The “interest rate” on a mortgage is simply the cost of a loan to borrow expressed as a percentage for a period of time. Your interest rate will always be expressed as a percentage and does not reflect any other charges related to your mortgage.

Your interest rate will usually be fixed unless you have an adjustable-rate mortgage (ARM). If you have an adjustable-rate mortgage your interest rate is subject to change depending on the term of your loan. You are responsible for paying back the principal you borrow along with any interest that accumulates over the life of the loan. Another important component that borrowers should understand is the basis points in mortgages.

What is the APR?

APR stands for “annual percentage rate”, and it includes your interest rate + additional fees and costs associated with your mortgage. It’s important to understand the additional costs grouped into the APR because it’s a more accurate reflection of the true cost of your loan.

APR = Interest Rate + additional fees and mortgage costs

APR > Interest Rate

The APR will always be higher than the interest rate because there are additional costs associated with taking out a mortgage. If you are a first-time homebuyer and are planning to get a mortgage it’s important to understand the costs and have your loan officer clearly explain them to you.

Below are some of the costs that go into your APR:

  • Private mortgage insurance (PMI)
  • Prepaid interest
  • Mortgage underwriting fees
  • Origination Fees
  • Discount points

The APR is usually listed on the loan estimate document and can change by the time you get ready to close your loan since loan fees are subject to change.

Important: The Truth in Lending Act (TILA) legally requires lenders to disclose the interest rate and the APR associated with the loan. [1]

Why is APR Higher than the Interest Rate?

APR is higher than the interest rate because it groups in the interest rate along with additional fees and costs associated with your loan. Comparing the APR to the interest rate is very important because it gives you an accurate representation of the true cost of your loan and also the fees of the lender.

Recommended Reading: Prime and Subprime Mortgages- Features, Types and Differences

If you notice that your APR is significantly higher than the interest rate of your loan, this is an indication that your lender may be overcharging you.

Important: Your APR should never exceed 0.50% of your regular interest rate.

If you notice that this is the case, chances are that your other lender fees are too high. There are many other lenders you can check that will have normal or below-market fees.

How is APR Calculated ?

The interest rate you receive for your mortgage is based on your overall creditworthiness. Unfortunately, borrowers don’t have any control over the APR when compared to the interest rate. The lender dictates the fees that go into the APR, like the origination fees, underwriting fees, and discounts points.

Check out our APR Calculator

There are ways to lower your APR, such as:

  • Putting at least 20% down to avoid private mortgage insurance
  • Negotiating your origination fees
  • Comparing lenders

Standard Fees Included in APR

Lenders will generally include the following fees below in the APR calculation.

  • Private Mortgage Insurance (PMI)
  • Transaction fees
  • Discount points
  • Underwriting Fees
  • Legal Fees
  • Application and processing fees
  • Mortgage broker fees
  • Recording fees

Fees Excluded from the APR

It’s important to know that certain fees are excluded from the APR.

  • Appraisal Fees
  • Title fees
  • Notary fees
  • Credit report fees
  • Pest inspection fees
  • Flood hazard inspection fees
  • Documents prep fees

Examples of APR Fees

James is in the process of shopping for a 30-year, fixed-rate mortgage. He needs a mortgage of $300,000 and is comparing two separate lenders. He’s well aware of how the APR works in comparison to the interest rate and has the following options below.

  • Lender 1

The first lender offers him a mortgage with a 4% interest rate. James has received a full list of all the lender fees and sees that the APR comes out 4.2%.  

  • Lender 2 

The second lender offers him a mortgage with a 3.8% interest rate. James has also received a full list of all the lender fees from the second lender and notices that the APR is at 4.4%.

So which option should James go with?

Lender 1 offers a lower interest rate than Lender 2, but looking closer into the details we see that Lender 2 has a much higher APR associated with the loan. Since we know that the APR is a more representative metric of the true cost of the loan, lender 1 is the better option in this scenario.

Things to Keep In Mind

By law, your lender has to disclose your interest rate and APR. It’s recommended to clarify with your lender which fees they have included in your APR.

It’s equally important to ensure that there isn’t a massive difference between your interest rate and your APR as that can indicate that your lender has excessive loan costs.


[1] Truth in Lending Act (TILA)