See a loan's true APR — the real yearly cost once fees are baked in, which is almost always higher than the quoted interest rate.
APR spreads fees over the loan term as if they were extra interest, so it's the fairer way to compare offers. It assumes you keep the loan the full term — paying off early makes the effective APR higher. General information.
The interest rate is what you pay on the balance; the APR folds in fees and closing costs to show the true annual cost. Two loans with the same rate can have very different APRs — always compare APRs.
APR = the rate that makes your payments' present value equal the money you actually receive
The quoted interest rate prices the balance. The APR prices the deal. The gap between them exists because of a simple asymmetry: you pay the fees up front, but you repay as though you had borrowed the whole amount. You did not — some of it went straight back out as origination, points and closing costs — so the real cost per dollar you kept is higher than the note rate. The CFPB states the distinction directly: the interest rate “does not reflect fees or any other charges you may have to pay for the loan,” whereas the APR “reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan.” That is why two offers at an identical 6% can cost meaningfully different amounts, and why the comparison that matters is APR against APR — alongside the itemised fee list, since the charges differ from lender to lender.
The defaults are a $200,000 loan at a quoted 6% over 30 years, with $4,000 in fees. First the payment, which the fees do not touch: at 0.5% a month over 360 months, $200,000 amortises to $1,199 a month. Now the part the rate hides — you only actually received $196,000, because $4,000 left at closing. The APR is the rate that reconciles those two facts: the annual rate at which 360 payments of $1,199 have a present value of exactly $196,000. Solve it and you get 6.2% (6.19% before rounding), about a fifth of a percentage point above the quoted rate.
That gap is worth translating out of percentages, because a fifth of a point sounds like nothing. Spread the $4,000 naively across 360 months and it looks like $11.11 a month. But money has a time cost, and the honest equivalent is this: a $200,000 loan at 6.19% with no fees at all would cost $1,223.57 a month — about $24 a month more than the $1,199 you are paying, for thirty years. That is what the $4,000 is really worth once it is annualised. It is also, usefully, the test for whether paying points is worth it: if buying the rate down costs you less per month than it saves you, it pays — over the full term.
APR assumes you keep the loan for its entire term. Almost nobody does. Run the same defaults but sell or refinance after five years: you have made 60 payments of $1,199 and still owe roughly $186,109 as a lump sum, and the rate that reconciles that cash-flow pattern with the $196,000 you received is about 6.5% — not 6.2%. The shorter the hold, the less time the fees have to spread, and the worse the true cost. At a seven-year hold it is roughly 6.4%, still above the full-term figure. The practical rule falls straight out of that arithmetic: the shorter you expect to hold the loan, the more you should favour the low-fee offer over the low-rate one, and the longer you expect to hold it, the more paying points makes sense.
Comparing an APR against a rate — the most common one, and it makes the honest lender look expensive. Comparing APRs across different terms, which is not like-for-like: a 15-year and a 30-year loan spread the same fees over different numbers of payments. Assuming every cost you pay at closing is inside the APR; the figure covers the charges you pay to get the loan, so ask each lender for the itemised costs rather than treating one number as the whole story. Forgetting that on a variable-rate loan the APR is built on today's index and tells you nothing about what happens after the reset. And rolling the fees into the balance instead of paying them — borrow $204,000 at 6% and the payment becomes $1,223 a month, which is the same $24 the APR was warning you about, now made visible.
One APR is a number; a decision is a comparison. What you actually need in front of you is three or four offers side by side with rate, fees, payment, APR and total interest in columns, plus the break-even month where a lower rate finally overtakes higher fees. That is a table, not a calculation. For the monthly payment and the full amortisation behind these figures, use the loan calculator; to test whether swapping to a new loan actually pays after its own fees, the refinance calculator does that comparison directly. General information, not lending advice — your Loan Estimate governs.
Because you pay fees up front but borrow the full amount — effectively you received less, so the real cost per dollar is higher.
If you'll pay the loan off early, the fees are spread over less time, so your real APR is higher than the quoted full-term APR.
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