Interest rate: The cost of borrowing the principal, expressed as a percentage. APR (Annual Percentage Rate): The total cost of the loan including interest + fees, expressed as a yearly rate. APR is always higher than the interest rate (unless there are no fees).
What's Included in APR?
- •Interest rate (always included)
- •Origination fees / lender fees
- •Mortgage broker fees
- •Discount points (if required, not optional)
- •Mortgage insurance premiums (for FHA loans)
- •NOT included: Title insurance, appraisal fees, attorney fees, homeowner's insurance
Real Example: Two Mortgage Offers
- •Lender A: 6.75% interest rate, $4,000 in lender fees → APR: 7.02%
- •Lender B: 7.00% interest rate, $500 in lender fees → APR: 7.05%
- •At first glance, Lender A looks cheaper. After fees, APR is nearly identical.
- •If you plan to keep the loan 5+ years, Lender A may win. Short hold? Lender B saves on upfront costs.
When APR Is Misleading
APR assumes you keep the loan for its full term. If you refinance or sell in 5 years on a 30-year mortgage, the APR comparison is misleading — lenders with high upfront fees but low rates look better on APR than they actually are for short holds. For short-term loans, compare total cost over your expected hold period instead.
Credit card APR is straightforward — it's the interest rate on carried balances, and cards don't typically have origination fees. For credit cards, focus on the APR directly; for mortgages and personal loans, compare APRs but understand the fee breakdown.
Rule: Always compare APRs when evaluating loan offers — not interest rates. Then, if two APRs are close, ask for the fee breakdown to understand which is truly cheaper for your expected holding period.