When you get a mortgage quote, you'll see two rates: the interest rate and the APR (Annual Percentage Rate). They're never the same number. Understanding the gap between them is one of the most useful ways to compare loan offers, and one of the most commonly misunderstood parts of the mortgage process.
What the Interest Rate Actually Is
The interest rate is the cost of borrowing the principal balance, expressed as a percentage. It's used to calculate your monthly payment. On a $400,000 loan at 6.75%, your monthly principal and interest payment is $2,594. The rate doesn't reflect anything about fees, points, or other costs.
This is the number most buyers focus on, and it's important, but it's not the whole picture. If you're comparing two lenders based on rate alone, you're missing half the equation. Our guide to comparing mortgage rates walks through the full framework for reading loan estimates side by side.
What APR Adds to the Picture
APR includes the interest rate plus most of the upfront loan costs, origination fees, discount points, mortgage insurance, and certain closing costs, spread over the life of the loan. It's expressed as a slightly higher rate than the interest rate.
A loan with a 6.75% interest rate and $4,000 in origination fees on a $400,000 balance, held for 30 years, might have an APR of 6.92%. Those fees, amortized over the full term, add about 0.17 percentage points to the effective cost.
Why APR Is Useful for Comparison
APR is where fee-heavy loans get exposed. One lender might offer a lower rate paired with $6,000 in origination costs. Another offers a slightly higher rate with minimal fees. Looking only at the rate, Lender A wins. Looking at APR, Lender B might actually cost less over time.
Example: Lender A offers 6.75% rate, 1 point ($4,000), APR 6.92%. Lender B offers 6.875% rate, no points, APR 6.90%. The higher rate from Lender B has a lower APR, meaning it costs less over the full loan term. Our post on how mortgage APR is calculated goes deeper on this math.
When APR Comparison Breaks Down
APR assumes you hold the loan to its full term. If you sell the home or refinance in seven years, the math changes. Paying points upfront for a lower rate only pays off if you hold long enough for the monthly savings to recoup the upfront cost. Any competent lender should show you the break-even point before you decide.
APR also doesn't include costs that vary by third parties, like title insurance and appraisal fees. Two loans with identical APRs from different lenders might have different total closing costs if one includes more third-party estimates.
Want us to run the break-even on points for your specific loan?
We walk through interest rate, APR, and the point break-even calculation before you commit. No guesswork on what the loan actually costs.
Get My Rate ComparisonDiscount Points: When Buying Down Makes Sense
Discount points let you pay upfront to reduce your interest rate permanently. One point costs 1 percent of the loan amount. On a $400,000 loan, one point is $4,000. It typically buys down the rate by about 0.25 percentage points.
At 6.75% your payment is $2,594. At 6.50% (one point purchased) it's $2,528, a difference of $66 per month. Divide $4,000 by $66 and you break even in about 61 months. If you plan to stay at least five years, buying the point makes financial sense. Our post on what mortgage points are and how they work covers this in full.
At 14 Days To Close, we walk through interest rate, APR, and break-even on points before you decide. Give us a call or start your pre-approval below.
