Annual percentage rate (APR)

APR is a federally-required disclosure that expresses the total cost of a mortgage as a single annual percentage. It includes the interest rate plus most lender fees, origination charges, points, and certain other costs, all amortized over the loan term. The point of APR is to let borrowers compare loan offers on equal footing, a 6.50% rate with two points isn't the same as a 6.75% rate with no points, and APR captures the difference in a single number.

How it works: the lender calculates APR by computing what the effective annual rate would be if the borrower kept the loan for the full term and the financed costs were amortized into the payment. The result usually exceeds the headline rate by 0.10% to 0.30% on a typical loan, with bigger gaps when points are paid or lender fees are high.

Why it matters: APR is a better comparison metric than the rate alone, especially when comparing loans with different fee structures. Two lenders quoting the same rate may have very different APRs, and the higher-APR loan is the more expensive one over time.

Common gotcha: APR assumes the borrower keeps the loan for the full term. Most borrowers don't, they sell or refinance long before 30 years are up. For a borrower who'll keep the loan five years, the APR's amortization assumption doesn't match reality. The Loan Estimate's page-3 comparison block, which shows total costs at year five, is sometimes a more useful comparison than APR alone.