What Is an Interest Rate?

The interest rate on a mortgage is the cost a lender charges you for borrowing money, expressed as a percentage of the loan principal. If you take out a $300,000 mortgage at a 6.5% interest rate, that 6.5% is the annual charge the lender applies to your outstanding balance. It is the single biggest factor in determining your monthly payment amount.

Interest rates are influenced by broad economic conditions such as inflation, bond market yields, and Federal Reserve policy, as well as your personal financial profile. To understand what drives rates up and down, see our guide on how mortgage rates are determined.

When a lender advertises a mortgage rate, they are quoting the interest rate alone. This number does not account for any of the additional fees and charges that come with obtaining the loan. That is where APR comes in.

What Is APR?

APR stands for Annual Percentage Rate. It is a broader measure of the cost of borrowing that includes the interest rate plus certain fees and charges associated with obtaining the loan. The APR is designed to give you a more complete picture of what a mortgage will actually cost you on an annual basis.

Federal law requires lenders to disclose the APR alongside the interest rate on every mortgage offer. This requirement, established by the Truth in Lending Act (TILA), exists specifically so borrowers can make meaningful comparisons between loan offers from different lenders. Since lenders structure their fees differently, two loans with the same interest rate can have very different total costs. The APR captures those differences in a single number.

Because APR includes additional costs beyond the base interest rate, it is almost always higher than the stated interest rate. If a lender quotes you a 6.5% interest rate and a 6.8% APR, the 0.3% gap represents the annualized impact of the fees and charges rolled into that loan. The larger the gap between the interest rate and APR, the more you are paying in fees.

What Costs Are Included in APR

Not every cost associated with buying a home is included in the APR calculation. Understanding what is and is not included helps you interpret the number correctly.

Costs that are typically included in APR:

• Origination fees: Charges the lender imposes for processing and underwriting your loan application. These are often expressed as a percentage of the loan amount, such as 0.5% to 1%.
• Discount points: Upfront payments you make to buy down your interest rate. Each point typically costs 1% of the loan amount. Learn more in our guide on mortgage points.
• Mortgage broker fees: If you use a mortgage broker, their commission or fee is factored into the APR.
• Certain closing costs: Prepaid interest, some settlement charges, and other lender-required fees are rolled into the APR calculation. For a full breakdown of what you pay at closing, see our closing costs guide.
• Private mortgage insurance (PMI) premiums: If your down payment is less than 20%, the cost of PMI is included in the APR for the period it is required.

Costs that are typically not included in APR:

• Title insurance: Protects against ownership disputes but is not part of the APR calculation.
• Home appraisal fees: Required by lenders to verify the property value, but excluded from APR.
• Home inspection costs: Paid by the buyer but not included in the APR.
• Recording fees and transfer taxes: Government charges for recording the deed and mortgage are excluded.
• Homeowner’s insurance and property taxes: While these affect your total monthly payment, they are not lender charges and are excluded from APR.

Because APR does not include every cost, it should be used as one comparison tool among several rather than the sole basis for your decision. Always request a full Loan Estimate from each lender so you can compare the complete cost picture side by side.

How to Compare Loan Offers Using APR

APR is most useful when you are comparing offers for the same type of loan with the same term length. A 30-year fixed-rate mortgage from Lender A should be compared against a 30-year fixed-rate mortgage from Lender B. Comparing a 15-year fixed APR against a 30-year fixed APR is misleading because the shorter loan has a different cost structure.

Here is a step-by-step approach to using APR effectively when shopping for a mortgage:

• Collect Loan Estimates from at least three lenders: Federal regulations require lenders to provide a standardized Loan Estimate within three business days of receiving your application. This document lists the interest rate, APR, estimated monthly payment, and all fees.
• Compare APRs for the same loan type and term: If all three offers are 30-year fixed mortgages, the APR gives you a reliable apples-to-apples comparison of total borrowing cost.
• Examine the gap between rate and APR: A small gap (0.1% to 0.2%) means the lender is charging relatively low fees. A large gap (0.5% or more) means significant upfront costs are baked into the loan. This matters depending on how long you plan to stay in the home.
• Consider your time horizon: If you plan to sell or refinance within a few years, a loan with a lower interest rate but higher upfront fees (and therefore higher APR) may cost you more than a loan with a slightly higher rate but lower fees. The APR calculation assumes you keep the loan for its full term.
• Use our rate comparison tool: Our rate comparison tool shows current rates from multiple sources so you can quickly see what lenders in the market are offering.

One important limitation to keep in mind: APR assumes you hold the loan for the full 30-year (or 15-year) term. If you refinance, sell, or pay off the loan early, the effective cost of those upfront fees is spread over fewer years, making the true annualized cost higher than the advertised APR. For borrowers who expect to move within five to seven years, paying close attention to the fee structure is especially important.

Real-World Example

Let’s walk through a concrete scenario to see how APR and interest rate differ in practice. Suppose you are borrowing $300,000 for a 30-year fixed-rate mortgage, and you receive offers from two lenders:

Lender A: 6.5% interest rate, 6.8% APR

• At a 6.5% interest rate, your monthly principal and interest payment would be approximately $1,896.
• The APR of 6.8% reflects roughly $5,400 in upfront fees (origination fee, discount points, and other lender charges) spread across the life of the loan.
• Over 30 years, you would pay approximately $382,633 in total interest, plus the $5,400 in fees, for a total borrowing cost of about $388,033 above the principal.

Lender B: 6.75% interest rate, 6.85% APR

• At a 6.75% interest rate, your monthly payment would be approximately $1,946 — about $50 more per month than Lender A.
• The APR of 6.85% is only slightly above the rate, reflecting roughly $1,800 in upfront fees.
• Over 30 years, you would pay approximately $400,380 in total interest, plus $1,800 in fees, for a total borrowing cost of about $402,180 above the principal.

The comparison: Lender A has the lower APR (6.8% vs. 6.85%), which means it is the cheaper loan if you keep it for the full 30 years. Over three decades, you would save roughly $14,147 with Lender A despite the higher upfront fees.

However, if you plan to sell or refinance within five years, the calculation changes. In that scenario, you have only five years to recoup the extra $3,600 in upfront fees you paid with Lender A. Over five years, the $50 per month you save with Lender A totals $3,000 — less than the additional fees you paid. In that case, Lender B would actually be the better deal.

This illustrates a critical point: the loan with the lowest APR is not always the best choice. Your expected time in the home matters enormously. Use our mortgage calculator to model different scenarios based on your timeline and compare total costs.

Key Takeaways

• The interest rate is the cost of borrowing the loan principal. The APR is a broader measure that includes the interest rate plus lender fees such as origination charges, discount points, and mortgage insurance.
• APR is almost always higher than the interest rate. The size of the gap tells you how much the lender is charging in fees.
• APR is most useful for comparing offers of the same loan type and term from different lenders.
• APR assumes you keep the loan for its full term. If you plan to sell or refinance early, a loan with a higher APR but lower upfront fees may actually cost you less.
• Always request a Loan Estimate from each lender. APR is a helpful shortcut, but reviewing the full fee breakdown gives you the most accurate comparison.
• The difference between APR and interest rate is not just academic. On a $300,000 mortgage, choosing the wrong offer can cost you thousands of dollars over the life of the loan.

Frequently Asked Questions

Why is the APR always higher than the interest rate?

APR includes the interest rate plus additional costs such as origination fees, discount points, and mortgage insurance premiums. Because it wraps in these extra costs, the effective annual rate of borrowing is higher than the base interest rate alone. The only situation where APR could equal the interest rate is if a lender charges absolutely zero fees, which is rare in practice. Even in no-closing-cost mortgage offers, the lender typically compensates by charging a slightly higher interest rate, which narrows but does not eliminate the gap.

Should I always choose the loan with the lowest APR?

Not necessarily. APR is calculated assuming you keep the loan for the full term — typically 30 years. If you plan to move, refinance, or pay off the loan within five to ten years, a loan with a higher APR but lower upfront fees may save you money. The key is to estimate how long you will actually have the loan and calculate the total cost over that realistic time horizon rather than the full loan term.

Does APR include property taxes and homeowner’s insurance?

No. APR only includes costs charged by or through the lender as part of the borrowing transaction. Property taxes, homeowner’s insurance, title insurance, appraisal fees, and home inspection costs are excluded from the APR calculation. While these expenses significantly affect your total monthly housing cost, they are not considered part of the cost of borrowing the mortgage itself. You will see these items itemized separately on your Loan Estimate and Closing Disclosure.

How is APR calculated?

APR is calculated by taking all the fees included in the APR (such as origination fees and discount points), adding them to the total interest paid over the life of the loan, and then computing the effective annual rate that would produce that same total cost if there were no separate fees. In simpler terms, it answers the question: “If all these fees were converted into a slightly higher interest rate instead, what would that rate be?” Lenders are required to follow the calculation methodology specified in Regulation Z of the Truth in Lending Act, which standardizes the formula across all lenders.