APR vs Interest Rate
The interest rate is what the lender charges on the principal. The APR adds in fees and spreads them across the loan term. See exactly how big the gap is for your loan — and what those fees actually cost.
Loan Details
Origination, points, mortgage insurance, etc.
Nominal Interest Rate
6.500%
What the lender advertises
APR (True Cost)
6.691%
Includes the $6,000 in fees
The Gap
0.191 percentage points
That spread between the headline rate and APR is the “real” cost of the fees, expressed as a rate over the life of the loan.
Cost Breakdown
| Item | Amount |
|---|---|
| Monthly payment (loan + fees) | $1,934 |
| Total paid over 30 years | $696,286 |
| Total paid if no fees were rolled in | $682,633 |
| Extra cost from financed fees | $13,653 |
Why Two Numbers for One Loan?
Federal law (the Truth in Lending Act, 1968) requires lenders to disclose an APR alongside the nominal interest rate, specifically so borrowers can't be misled by a low-rate offer that hides expensive fees. The APR translates “upfront fees” into “a slightly higher rate” — a single apples-to-apples number you can compare across lenders.
Mechanically, APR is calculated by figuring out the monthly payment on the full financed amount (loan + fees) at the nominal rate, then solving for the interest rate that produces that same payment on just the loan amount (without fees). The result is always at least the nominal rate, and usually 0.1–0.4 percentage points higher on a 30-year mortgage.
The most common APR-vs-rate confusion: borrowers see a 6.5% rate and a 6.7% APR and assume they'll be charged 6.7%. They won't — their actual payment is computed at 6.5% on (loan + fees), and the 6.7% APR is just a summary statistic. Look at the monthly payment and the total fees, not the APR alone.
When APR Lies
APR is a useful but imperfect tool. It breaks down in several common situations:
- Early payoff or refinance. APR assumes you hold the loan to maturity. Pay it off in 5 years and the fees got amortized over 5 years, not 30 — making the effective rate much higher than the disclosed APR.
- Adjustable-rate mortgages. APR on an ARM assumes future rate adjustments based on the current index. Reality is anyone's guess.
- Different loan types. Comparing a 15-year and 30-year APR is comparing apples and oranges — fees spread over different timelines.
- Different fee mixes. Two loans with identical APRs can have very different fee structures. One might be 6.5% + $6,000 fees, the other 6.6% + $3,000 fees. The second is cheaper if you sell within 7 years.
The safer comparison: look at the total cost (principal + interest + fees) over the period you actually expect to hold the loan. Use this calculator and the refinance calculator together to model that scenario directly.
Frequently Asked Questions
What's the difference between APR and interest rate?
The interest rate is the cost of borrowing the principal, expressed as a percentage. APR (Annual Percentage Rate) includes the interest rate plus mandatory loan fees — origination, discount points, mortgage insurance, and some closing costs — spread over the loan term. APR is always equal to or higher than the nominal rate.
Why is APR higher than the interest rate?
Because fees are baked in. The lender takes the upfront fees (say $6,000) and effectively divides them across the loan term, then expresses the total cost as an annualized rate. A 6.5% mortgage with $6,000 in fees on a $300,000 loan typically has an APR of about 6.65–6.75%.
Which should I use to compare loans?
APR — for comparing similar loan products (e.g. two 30-year fixed offers). It normalizes the fees so you're not fooled by a low headline rate hiding $10,000 in points. But APR breaks down for loans you'll pay off early, ARMs (where the rate changes), or when comparing different loan types.
Do all fees show up in APR?
No. APR includes finance charges defined by the Truth in Lending Act: origination fees, discount points, mortgage insurance, and some prepaid interest. It excludes third-party fees like title insurance, appraisal, credit report, and recording fees. Two lenders quoting the same APR can still have different total closing costs.
Can a higher APR loan be cheaper?
Yes — if you pay it off early. APR amortizes fees over the full loan term. If you refinance or sell in 5 years on a 30-year loan, you paid all the fees upfront but only got a fraction of the APR's benefit. In that case a no-fee, higher-rate loan often beats a lower-rate loan with big upfront costs.
Compare Your Full Mortgage Cost
Plug your loan into the main calculator to see monthly payments, full amortization, and how extra payments can offset the cost of fees.
Open the Mortgage Calculator