Interest isn’t the only cost of borrowing money through a mortgage. The annual percentage rate — or APR — helps you get a feel for how much you’ll pay for that loan including some of its additional expenses. Comparing APRs between lenders can help you find the most affordable mortgage. 

When you think about how much it costs to buy a house, your mind might go a few places. You’ll think about the actual price of the home, of course, but you might also consider the maintenance costs or property taxes. To get a clear picture of the total cost, you also need to think about how much you’ll pay to borrow money through a mortgage.

The hundreds of thousands of dollars mortgage lenders extend don’t come free. Lenders charge interest, earning a profit and helping to offset the risk of offering you so much money. But that’s not all. Lenders usually include some other fees, too, which they charge to originate (basically, create) and service (basically, maintain) your loan. 

It can be kind of tricky to figure out what extra costs come with your mortgage, but there’s a tool that can make it easier: your annual percentage rate, or APR. This percentage includes many of the costs associated with the loan. As a result, it gives you a better way to figure out how much borrowing that money will actually cost you than looking at the interest rate alone. 

Defining annual percentage rate

Plenty of authorities have laid out definitions for APR. The Consumer Financial Protection Bureau (CFPB), for example, says, “The annual percentage rate is a measure of the cost of credit, expressed as a yearly rate, that relates the amount and timing of value received by the consumer to the amount and timing of payments made.” 

If that left you scratching your head, you’re not alone. Because a lot of the APR definitions issued by authorities are pretty confusing, we wanted to give you a simpler way to understand this rate. 

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Your annual percentage rate represents the total cost of borrowing your home loan each year, including the interest rate and some other fees that come with the loan. 

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Like an interest rate, your annual percentage rate gets expressed as a percentage. Unlike the interest rate, though, it includes some fees that come with the loan, like origination fees you pay to the lender. 

Here are a few things you should know about this rate:

• Even when you pay those on the frontend of the loan (e.g., at the closing table), they get included in the APR. In that APR calculation, they’re averaged out over the life of the loan. 
• Because the APR is equal to your interest rate plus other costs, it will always be higher than the interest rate alone. 
• Mortgage lenders are legally required to share the annual percentage rate they’ll charge with you. You can find it ​​on the third page of your Loan Estimate under “Comparisons.”

That annual percentage rate disclosure helps you get a real feel for the cost of the loan. Let’s say two lenders both offer you interest rates of 6.50%, but one offers an APR of 6.70% and the other offers 6.85% APR. It will cost you less overall to borrow from the lender with the lower APR. 

APRs on fixed vs. adjustable-rate loans

If you get a fixed-rate loan, your interest rate — and, consequently, your APR — won’t change over the life of your loan. With a 30-year mortgage, for example, you’ll have the same APR the whole time. 

That doesn’t mean you’ll be paying the same amount in interest for all three decades, though. Your monthly payment stays the same (lenders calculate this based on what they call an amortization schedule) but your interest payments will change. 

In the beginning, the bulk of that monthly payment will go toward paying off interest. Through the years, though, that balance starts to tip. As your loan balance gets smaller, the amount of interest you need to pay does, too. Eventually, more of your monthly payment goes toward your balance, and a smaller portion goes toward interest. 

That applies if you get a fixed-rate loan. If you get an adjustable-rate mortgage (ARM), things are different.

Specifically, with an ARM, your APR can change because your interest rate can. Depending on the kind of loan you get, your lender can adjust your rate periodically (usually, every six months or once a year) in response to market conditions. 

Fixed-rate loans offer the predictability of a steady annual percentage rate. But ARMs typically start with lower APRs than fixed loans. If you’re open to a little risk or you’re planning to move in the near future, an ARM might be a way to get a lower APR on your mortgage.  

What APRs typically include

Since we’ve explained that your annual percentage rate equals your interest rate plus other fees averaged out over the life of your loan, you’re probably wondering: what are those other fees?

Lenders have a little bit of leeway in what they include here. That said, your APR will usually include your interest rate plus:

Fees related to creating your loan 

These might be called origination or underwriting fees. You’ll probably need to pay these costs upfront at the closing table, meaning they’re required to get the keys to your house, but they’ll still be included in your APR 

Lenders charge these fees to create (i.e., originate) your loan. It requires quite a bit of work for their team to evaluate you as a borrower, decide how much to lend to you, and at what interest rate (i.e., underwrite the loan). The origination or underwriting fee covers that cost for them. 

Some lenders will also include the cost of getting your credit report and your application fee in your APR. 

Discount points

If you paid for points to lower your interest rate, the amount you paid gets included in your APR. 

Private mortgage insurance (PMI)

If you put less than 20% down on your home, you’ll usually need to pay private mortgage insurance. A smaller down payment leaves you with a higher loan-to-value (LTV) ratio, which lenders see as risky. They make you pay for this insurance coverage to offset that risk for them. 

If you’ll be paying PMI, it usually gets factored into your annual percentage rate. 

Title fees

Taking over the title to your house is what legally makes you the owner. As a result, most lenders require a thorough title search to make sure there aren’t going to be any ownership issues that crop up in the future. Your APR might include the cost of that title search. It might also factor in the title insurance lenders usually require for further protection. 

Broker fees

If you worked with a broker to get your mortgage loan, their fee is typically factored into your APR. 

Comparing annual percentage rate offers to find the best mortgage rate

Lenders differ in how they calculate APRs. Some include the cost of a title search, for example, while others don’t. You can ask each lender about what they take into account when determining APRs. 

Once you have clarity, comparing APRs can help you figure out which company can really extend you the most affordable loan. Let’s say Lender 1 offers you an interest rate of 6.8%, but their APR is 7.2%. Lender 2 can extend an interest rate of 6.95% and an APR of 7.1%. Borrowing from Lender 2 will probably save you money through the years. 

Fortunately, comparing APRs doesn’t have to be hard. To give you an idea of what kind of annual percentage rate you can expect, use our Rates.Now rate comparison tables. 

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