APR vs. Interest Rate: What’s the Real Cost of Your Mortgage?
When you apply for a mortgage, lenders are required to disclose two numbers: the interest rate and the APR (Annual Percentage Rate). Most borrowers focus on the interest rate alone — but APR tells a more complete story. Here’s how APR is calculated and what it actually means for you.
What Is APR?
APR represents the true annual cost of borrowing, expressed as a percentage. Unlike the note rate (interest rate), APR factors in certain upfront fees you pay to obtain the loan — giving you a more complete picture of what the loan actually costs.
The Three Types of Mortgage Fees
Getting a mortgage involves fees from three parties:
- Lender fees — origination fees, underwriting fees, points
- Broker fees — if a mortgage broker is involved
- Third-party fees — title company, escrow, appraisal, recording fees, etc.
Among these, Lender and Broker fees are classified as Pre-paid Finance Charges (PFC). These fees are deducted from your loan proceeds for APR calculation purposes.
How APR Is Calculated — Step by Step
Key insight: APR is always higher than the note rate because you’re paying the same monthly amount but received less money (due to fees). The more fees, the higher the APR relative to the note rate.
What Counts as PFC? (It Varies by Lender)
This is where it gets nuanced. Different lenders include different fees in their PFC calculation:
Typically always included:
- • Loan origination fee
- • Mortgage broker fee (if applicable)
- • Discount points
Sometimes included (varies by lender):
- • Lender’s Title Insurance
- • Owner’s Title Insurance
- • County Recording Fee
- • Appraisal Fee
Because lenders use different PFC definitions, comparing APRs across lenders can be misleading. A lender with a higher APR might actually have a more complete disclosure, not necessarily higher costs.
The Right Way to Use APR
- ✓Don’t compare APR to note rate in isolation — they will always differ, and that’s expected
- ✓Do compare APR across lenders — but only if they use the same PFC definition (ask your loan officer)
- ✓Most importantly: understand the actual dollar fees you’re paying. Ask for an itemized breakdown of all closing costs — the total fees matter more than the APR number itself
- ✓APR assumes you hold the loan for the full 30 years — if you refinance in 5 years, the effective cost per year is higher
Quick Summary
| Note Rate | APR | |
|---|---|---|
| What it reflects | Interest only | Interest + certain fees |
| Example | 6.625% | ~6.652% |
| Always higher? | — | ✅ Yes (always ≥ note rate) |
| Useful for | Monthly payment calculation | Comparing total loan costs |
| Limitation | Ignores fees | Varies by lender’s definition |
Questions About APR or Your Loan Costs?
A Tiger Loans mortgage professional can walk you through your exact numbers — note rate, PFC, and APR — so you know exactly what you’re paying.
Talk to a Loan OfficerThis article is for educational purposes only and does not constitute financial or legal advice. APR calculations may vary by lender. Consult a licensed loan officer for guidance specific to your loan.