Closing costs and APR | APR vs. interest rate | What's my APR? | Comparing loans using APR | Summary | FAQs
Yes, the annual percentage rate (APR) on a home loan includes many closing costs related to a mortgage or refinance.
APR consists of the interest your lender charges for the loan, plus any points, mortgage broker fees, and other costs associated with the mortgage. In a nutshell, the APR is a broader measure of borrowing costs.
When comparing lenders and their mortgage terms, you should look at the APR disclosure because it gives you a more accurate, apples-to-apples comparison than the interest rate alone.
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Which closing costs are included in APR?
| Closing costs typically included in APR | Closing costs typically NOT included in APR |
|---|---|
|
|
Most closing costs are included in the APR. But some, like the loan application fee, may or may not be part of the equation. You can view an itemized list on your loan estimate.
You should ask your lender to identify any additional fees that aren’t factored into the APR. In some cases, for instance, lenders pay the borrower’s closing costs for a fee.
Do closing costs affect APR?
Yes. Higher closing costs typically mean a higher APR, while lower closing costs bring the APR down. The wider the gap between interest rate and APR, the higher the closing costs and loan fees.
What’s the difference between APR and interest rate?
- The APR (annual percentage rate) factors in most of the costs of borrowing money to buy a house, including interest and other loan-related fees.
- The interest rate relates to the principal loan amount only — not any loan-related fees or additional charges.
Your APR will almost always be greater than your interest rate.
For example, suppose you borrow $375,000 at a 5.526% interest rate on a 30-year fixed-rate mortgage. At the end of the 30-year term, you will have paid $393,718.83 in interest alone — a total of $768,718.83 if you don't refinance.
By contrast, the APR calculates the "extended price" of your loan (beyond mere interest) as a percentage rate.
To get the APR, the lender adds the loan-related fees (closing costs, discount points, PMI, loan origination fee, etc.) to the interest you’ll pay ($393,718.83). That sum raises the total cost of the loan.
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How do I know what the APR will be?
Lenders are legally required to disclose their APRs when you apply for most types of home loans (not reverse mortgages, HELOCs, manufactured housing loans, and some special programs) on a loan estimate.
Your loan estimate also discloses other vital data:[1]
- Amount you’re borrowing
- Total finance charges you’ll pay
- Final amount you'll have spent at the end of your loan term
- Itemized closing costs
- Estimated interest rate
- Projected monthly mortgage payment
Why APR is better than interest rates when comparing loans
Unlike the interest rate, the APR gives you more complete information on the total cost of a loan.
Say Lender A offers a 30-year mortgage at a fixed 5.5% interest rate. But the rate with Lender B is only 5.475%, so Lender B may look like the better deal.
However, Lender B charges higher loan processing fees, tallying its APR to 5.6%. Meanwhile, Lender A’s loan is only 5.575%.
| Lender A | Lender B | |||
|---|---|---|---|---|
| Principal amount |
$375,000 |
$375,000 |
||
| Closing costs |
$6,480 |
$10,800 |
||
| Interest rate |
5.5% |
$391,440 |
5.475% |
$389,280 |
| APR |
5.575% |
$397,920 |
5.6% |
$400,080 |
| Total |
$772,920
|
$775,080
|
||
By comparing the APR on each loan, you can determine the best option and know of any additional loan-related costs.
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How to compare loans using APR
The simplest way to compare mortgage APRs is with the loan estimate, which lenders must provide you within three business days of your application.
APR is a good starting point when deciding which loan is best for your situation, but consider all the loan terms. The Consumer Financial Protection Bureau recommends comparing loan offers from at least three different lenders.[2]
Steps to compare loan offers using APR:
- Only compare fixed-rate mortgages.
- Confirm all the details reflect accurate loan information.
- Closely review the loan terms on page 1, looking for any risky or atypical loan features:
- Negative amortization (loan increases after settlement)
- Prepayment penalty
- Balloon payments
- Compare estimated cash to close figures (additional funds you must bring to closing).
- Note whether there’s a rate lock on page 1 (if there's not, your rate may change before closing).
- Find the APR of each loan estimate on page 3.
Comparing the APRs of loans without fixed rates
Be cautious when comparing the APRs of adjustable-rate mortgage loans because they don’t represent the loan's maximum interest rate. A closed-end loan that includes fees and a home equity line of credit that does not, for example, won't have comparable APRs.
You should also be more vigilant when comparing fixed-rate APRs with various adjustable-rate loan APRs.
💡 Editor's tip: Check for prepayment penalties
Your mortgage type and loan conditions determine whether there’ll be a prepayment penalty for paying off your mortgage early. You can sometimes find the prepayment penalty terms in an "addendum to the note" section of your loan papers.
Those fees may add up quickly, particularly if you refinance an adjustable-rate mortgage before rates rise. However, many states have restrictions for the dollar amount or length of time that these penalties are applied.
Summary
- The APR (annual percentage rate) factors in most costs of borrowing money to buy a house, including interest and closing costs.
- The interest rate relates to the principal loan amount only, so it's not as reliable for figuring out how much you'll owe in total.
- Lenders are legally required to disclose their APRs when you apply for most types of home loans (not reverse mortgages, HELOCs, manufactured properties, etc.).
- Comparing the APRs is a straightforward method of determining which lender has the least expensive loan overall.
More FAQs about APR and closing costs
Can the APR rate change?
The lender can change the APR by up to 1/8 of 1% (0.125%) before closing without disclosure.
When will I be notified of the APR rate?
Your lender must send you a loan estimate that includes the APR rate no later than three business days after you apply.
What is APR on a mortgage?
A mortgage APR is a stated percentage rate that helps buyers measure borrowing costs for a home loan. The APR calculation includes interest, most closing costs, mortgage insurance, discount points, and loan origination fees.
Why is APR so much higher than interest rate?
The annual percentage rate is higher than the simple interest rate because APR includes the interest you’ll pay, plus all the fees the lender requires to process the loan.