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When you’re buying a house, sometimes it can feel like mortgage lenders and brokers are speaking a different language. If you’re shopping for a mortgage, you’ll likely come across the term APR, which is an important concept to understand before you commit to a home loan.
So, what is the APR on a mortgage, and how do you know what makes a good one? Here’s what you need to know and how to calculate this percentage.
The APR on a mortgage stands for annual percentage rate. It signifies the yearly cost of your loan, which includes not just the interest rate but also additional charges like the origination fee and mortgage points. This makes the APR a better indicator of the full cost of borrowing money for a mortgage than the interest rate alone, so it’s important to understand this number when comparing lenders to get the best deal for you financially.
The interest rate is simply an annual percentage that shows how much it costs to borrow money from a lender. It doesn’t account for any extra fees or charges related to the loan — that’s where the APR comes into play. For the most accurate comparison between two mortgage offers, the APR will give you a much better idea of how much each offer will cost overall than just the interest rate.
Keep in mind not all costs are always incorporated in the APR, and the way lenders calculate APR can vary. That’s why it’s important to ask lenders which fees they factor into the APR calculation for your loan.
To give you that all-in cost, some of the fees the APR might factor in include:
Good news: You don’t have to do the math here. The mortgage lender calculates the APR for you. If you want to double-check the lender’s work, you can calculate the APR yourself by following these steps:
Or, if you want to do things with less pencil-pushing, you can use Bankrate’s mortgage APR calculator. Once you input the loan information, you’ll receive a full amortization, or repayment, schedule, either by year or by month.
Many lenders advertise the APR for their loan products, which can help you more accurately compare mortgage offers and costs.
Once you find a mortgage lender, have your loan officer walk you through different APR scenarios so you can make an informed decision. For example:
| APR with fee and no points | APR with fee and 1 point | APR with fee and 2 points | |
|---|---|---|---|
| Amount borrowed | $310,000 | $310,000 | $310,000 |
| Interest rate | 6.5% | 6.25% | 6.0% |
| Loan term | 30 years | 30 years | 30 years |
| Origination fee (1% of amount borrowed) | $3,100 | $3,100 | $3,100 |
| Points (1% of amount borrowed) | $0 | $3,100 | $6,200 |
| APR | 6.596% | 6.691% | 6.787% |
In terms of mortgages, the two main types of APRs you should know include:
The mortgage market changes on a daily basis, so a “good” APR one day might not be so good the next. Currently, mortgage rates have been fluctuating, so if you’re ready to buy a home and a lender offers you a rate you like, ask for a rate lock. Keep an eye on rates so you understand longer-term trends and what’s considered a fair rate. Bankrate’s mortgage rate tables can help.
Your credit score plays a significant role in determining the APR you’re offered when applying for a mortgage. A higher credit score usually means a lower interest rate, as it signals to lenders that you’re a lower-risk borrower. Conversely, a lower credit score could lead to higher rates due to the increased risk you pose to lenders.
APR represents the yearly cost of a loan, including fees, while annual percentage yield (APY) shows the yearly earnings on an investment, taking compound interest into account. Compound interest impacts nearly all financial transactions, but APR is generally presented for loans, and APY is generally presented for savings, vehicles and investments.
