How APR is calculated
The monthly payment is fixed by the note rate and the loan amount. APR asks a different question: at what rate would that same payment stream be justified if the loan you received were only the amount that actually reached you, after fees? Mathematically it is the discount rate at which the present value of all payments equals the amount financed, solved numerically because no closed-form expression exists.
The consequence is that fees paid up front are amortized across the whole term. A $6,000 fee on a 30-year loan adds roughly a fifth of a percentage point to the APR. The same fee on a 15-year loan adds nearly twice that, because it is spread over half as many payments. Comparing the APRs of loans with different terms tells you almost nothing.
What counts as a finance charge
- Included: Origination fees, discount points, underwriting and processing charges, document preparation, prepaid interest, and mortgage insurance premiums. Broadly: anything the lender charges you for the privilege of lending.
- Excluded: Title insurance, the appraisal, the credit report, the survey, recording fees and transfer taxes. Regulation Z leaves out costs the borrower may shop for or that go to third parties. This is why two lenders can quote an identical APR and still cost different amounts at the closing table.
Where APR misleads
APR assumes you keep the loan for its entire term. Most borrowers do not — the median mortgage is retired well before maturity through a sale or refinance. When you leave early, the fee was not spread across 360 payments; it was spread across the payments you actually made, and the effective cost was much higher than the disclosed APR suggested.
For an adjustable-rate mortgage the disclosed APR is a projection built on the assumption that the index stays where it is today. It will not. Treat the APR on an ARM as a description of the introductory period, not a forecast.
The practical approach is to ignore APR when comparing loans you might not keep, and instead compare total cost over your realistic holding period: the fees, plus the interest you would actually pay in that window. A lender credit that raises your rate and eliminates $5,000 of fees is a bad deal over 30 years and an excellent one over four.
Frequently asked questions
What is the difference between interest rate and APR?
The interest rate determines your monthly payment. The APR restates the total cost of the loan — interest plus the fees required to obtain it — as a single annual rate, so two quotes with different fee structures can be compared. APR is always at least as high as the note rate, and equal to it only when there are no finance charges at all.
Is a lower APR always better?
Only when the terms are otherwise identical and you intend to keep the loan for its full term. A lower APR achieved by paying large upfront fees is a poor trade if you sell in five years, because the fee was real and the rate saving never had time to repay it. Compare total cost over the period you will actually hold the loan.
Why is my APR so much higher than my interest rate?
A large gap means the fees are large relative to the loan, the term is short, or both. A spread over about a quarter of a point on a 30-year loan is worth investigating line by line on the Loan Estimate — it usually points to discount points, a high origination fee, or mortgage insurance being priced in.
Does APR include closing costs?
Some of them. APR includes lender charges and prepaid finance charges, but excludes third-party services you are allowed to shop for, such as title insurance and the appraisal. It is a measure of the cost of the loan, not the cost of the transaction, so your cash to close will exceed what the APR reflects.
Reference sources
Related calculators
For developers
This calculation is also available as a REST API and through an MCP server, both running the same engine as this page — so the figures match by construction rather than by convention. No key required.