When you buy a house, does the APR include your closing costs? Yes, APR includes several closing costs, but not all of them — and knowing which fees are factored in can help you avoid surprises when shopping for home loans.
The APR on your mortgage includes the interest rate plus the costs of relevant lender fees, like points and broker fees, and is typically calculated as a percentage. In that sense, APR gives you a more accurate picture of the total costs associated with the loan than just the interest rate.
APR is useful because it lets you directly compare the costs of two or more loans. When looking for a mortgage, you should assess APR because it’s a more accurate measure of how much you’ll pay to borrow money.
What is APR and why does it matter?
The annual percentage rate (APR) on a mortgage is a measure of the total cost of the loan. It is calculated using the interest rate plus various other loan fees, such as origination fees.
The interest rate tells you the cost of borrowing money, but the APR includes the cost of borrowing money plus any applicable fees. As such, your APR will always be higher than your interest rate.
This APR definition matters because it tells you what fees a lender charges. Two loans with the same interest rate can have different APRs because one lender charges more fees than the other.
For instance, two lenders both offer a 5.75% interest rate but have respective APRs of 5.83% and 5.90%. A higher APR means that the second lender charges higher upfront fees for the loan. The law requires lenders to show APRs so that consumers understand the full costs of financing the loan.
Differences between interest rates and APR are typically small. But those differences can gradually add up when considering the values and timeframes of traditional mortgages. Even a small difference in the APR can mean spending thousands of dollars more (or less).
Does APR include closing costs?
The APR on your loan includes some closing costs, but not all of them.
Closing costs typically included in APR:
✅ Origination fees (e.g., processing, administrative, underwriting fees, etc.)
✅ Mortgage discount/rebate points
✅ Private mortgage insurance (PMI) premiums
✅ Pre-paid interest
✅ Loan application fees
Closing costs typically NOT included in APR:
❌ Title fees
❌ Appraisal costs
❌ Attorney fees
❌ Notary fee
❌ Escrow fees
❌ Homeowners insurance
❌ Document-preparation fees
❌ Home inspection costs
❌ Transfer taxes
❌ Credit report fees
❌ Property taxes
APR includes some closing costs but doesn’t typically account for third-party fees or prepaid costs. APR describes all the annualized costs associated with borrowing money from the lender, so external fees are usually excluded from calculations.
The Truth in Lending Act legally requires lenders to disclose APRs so consumers can more accurately compare and contrast mortgage products.[2] A loan might offer a great interest rate, but hidden fees can quickly increase the costs. By looking at the APR, you can avoid hidden fees and get a better picture of what you’ll pay over the lifetime of the loan.
The specific fees that factor into APR depend on the lender. When the lender gives you your Loan Estimate, it should have an itemized list of what fees are factored into the APR.[3]
Make sure to ask your lender about additional fees not covered in the APR. In some cases, lenders can cover additional closing costs in exchange for a higher APR.
How closing costs affect APR
APR accounts for various closing costs, so a higher APR means higher closing costs. Similarly, a lower APR typically means lower closing costs.
The greater the spread between the interest rate and APR, the more in closing costs you’ll have to pay. This spread lets you compare closing costs between lenders fairly easily and identify hidden fees.
The most obvious case is when two lenders offer the same interest rate but different APRs. In this case, the lender with the lower APR is charging fewer closing costs.
Say lenders A and B are offering a $250,000 loan at 6% interest, but A has an APR of 6.09% and B has an APR of 6.19%. With these numbers, closing fees for A are $2,500, and closing costs for B are $5,000 — a $2,500 difference. Lender A charges less in closing costs, so the APR is lower.
APR vs. interest rate explained
Interest rate and APR are two distinct but related concepts:
- The interest rate or nominal interest rate applies only to the principal loan amount and represents the interest expense over the loan term. Mortgage interest rates depend on the loan-to-value ratio, your credit score, and other financial/economic factors.
- APR includes interest as well as other loan-related fees (e.g., origination costs, discount points, mortgage insurance, etc.). Because it includes interest, APR is usually higher than the advertised interest rate.
You can think of the APR as showing the “extended cost” of the loan beyond just the raw interest. It includes all the other loan expenses not captured by the interest rate.
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In some cases, interest rates and APR can be the same. This may be the case in so-called “no-fee” mortgages.
With a no-fee mortgage, the lender doesn’t charge any origination fees or other fees associated with loan creation or underwriting. Instead, the lender makes up for these costs with a higher nominal interest rate.
How to find and compare APR
The loan’s APR gives you a more complete picture of the loan’s costs, so it's a useful measure for comparing loan offers. Here is a quick guide on how to get the most out of APR comparisons.
#1. Check the Loan Estimate
The easiest way to find APR is to check the Loan Estimate. The Loan Estimate should contain information regarding your interest rate and comprehensive APR. Your Loan Estimate should also contain information about additional loan fees that the APR does not include.
#2. Compare at least three lenders
The Consumer Financial Protection Bureau (CFPB) recommends comparing loan offers from at least three lenders.[4] The table below shows cost breakdowns and APR for three hypothetical loans.
| Lender A | Lender B | Lender C | |
| Interest Rate | 6.50% | 6.25% | 6.00% |
| Origination Fees | $2,500 | $2,500 | $2,500 |
| Discount Points | $0 | $2,500 | $5,000 |
| Other Fees | $2,000 | $2,000 | $2,000 |
| APR | 6.67% | 6.51% | 6.35% |
#3. Look beyond APR for special loan terms
You also need to look beyond your APR for additional factors that could impact loan costs. One big example is prepayment penalties.
If you sell or refinance the home early, you may have to pay an early payment penalty, which can make the loan more expensive than the initial APR would suggest.
💡 Editor’s tips
APRs are most useful when comparing fixed-rate mortgages. This is because APR on an adjustable-rate mortgage might not represent the maximum interest.
The bottom line
Annual percentage rates (APRs) provide a broader-level view of the costs you’ll incur from a mortgage. Since interest rates only apply to the loan principal, they exclude expenses from servicing the loan itself.
APR gives you a more accurate measure of the loan’s total cost than the interest rate by itself, so you can directly compare mortgages to see which lenders charge more fees.
Every loan provider has to tell you which closing costs are included in APR calculations. When looking through loan offers, make sure you compare APRs to give you a better idea of the costs you’ll pay. By comparing APRs, you can find which loan is the least expensive overall.
Finding the right agent can save you thousands in closing costs, getting you a lower APR. Clever can connect you with agents all across the country to negotiate savings and keep more money in your pocket.
FAQ
APR includes some closing costs, such as mortgage points and origination fees. However, it typically does not include third-party fees like home inspection, appraisal, or title fees.
APR calculations typically exclude any fees not related to the process of underwriting the loan itself, like title fees, home inspection costs, notary fees, and insurance or taxes.
Your interest rate doesn’t directly impact closing costs, but decisions about your interest rate can. For example, buying mortgage discount points can lower your interest rate in return for higher closing costs.
Similarly, rebate points can lower closing costs in exchange for a higher interest rate.
The APR is usually higher than the interest rate because it includes the interest rate plus other fees required for the lender to process the loan. APR can be lower than the nominal interest rate in rare cases where the seller offers a rebate on interest expenses.
Yes, APR can change before closing in some circumstances. Lenders are allowed to change some fees before closing, and these fees can factor into APR calculations.
The CFPB limits the kinds of closing costs changes lenders can make after they provide you with a Loan Estimate.[1]