Quick Answer
Because APR bundles in costs like some lender fees along with the interest rate, it usually runs a bit higher than the rate itself. Comparing APR across lenders on your loan estimate is one of the more reliable ways to spot the better overall deal.
- What it includes
- Interest rate plus certain lender fees
- Where to find it
- Page 3 of your loan estimate
- Typically
- Slightly higher than your quoted interest rate
- Best use
- Comparing total loan cost across lenders
Why APR Runs Higher Than Your Rate
Your interest rate reflects only the cost of borrowing the principal, while APR folds in certain finance charges, like some lender fees, required by the loan, then spreads that added cost across the loan term to produce a single yearly figure. That's why the APR on your loan estimate is typically a bit higher than the interest rate itself.
A wider gap between the two numbers often signals more upfront fees baked into the loan, which is worth asking your lender to explain.
Using APR to Compare Lenders
Because federal disclosure rules require the same APR calculation method across lenders, it gives Central Indiana buyers a more apples-to-apples way to compare offers than the interest rate alone. Still, it's smart to look at both the rate and the APR, along with total cash to close, before choosing a lender.
APR assumes you keep the loan for its full term, so it can be less useful if you expect to sell or refinance within just a few years.
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Frequently Asked Questions — Annual percentage rate (APR)
Is APR always higher than the interest rate?
Almost always, since it adds certain fees on top of the interest rate, though the gap size varies by lender and loan.
Does a lower APR always mean a better loan?
Generally yes, but also review the interest rate itself and how long you plan to keep the loan, since APR assumes the full term.
Where do I find my APR?
It's disclosed on your loan estimate and again on your closing disclosure before you sign.
Do discount points affect APR?
Yes, paying points to lower your rate is factored into the APR calculation.