APR Comparisons Can Be Deceiving—Here’s Why

When you’re shopping for a mortgage, don’t fall into the trap of comparing only APRs. The APR, or annual percentage rate, is an estimate of how much you will pay on your loan during an entire year’s time. The APR lenders advertise is more than an interest rate—it has to include other fees and costs involved in the loan.


Despite that, lenders can still offer deceptively low APRs by not including every fee involved in closing. For that reason, you need to compare the entirety of the APR’s details, not just the rate itself.

Fees included in the APR

The APR takes into consideration the following aspects of mortgage loans:

Discount points: These points can lower your interest rate by a small amount, and you have to pay them at closing.
Origination fees: These fees are charged by lenders for the work they put into producing your loan.
Mortgage insurance: If you provide less than a 20% down payment, you will most likely have to pay monthly insurance premiums on your mortgage to protect the lender in case you default on the loan. If you have an FHA loan, mortgage insurance is required regardless of your down payment.
Prepaid mortgage interest: If you have to pay mortgage interest, you will probably have to pay some portion at closing to cover the gap between the time of closing and the time of your first mortgage payment.

Fees not included in the APR

The APR does not include certain fees, like those for the credit report, appraisal, title insurance, and inspection. So a lender might offer an enticingly low APR but then inflate those fees for a bigger profit.

Borrowers might compare APRs to find the best deal, not realizing how other fees can increase their payment amounts significantly.

Be wary of advertised rates

When lenders advertise APRs, they display the rates they offer under ideal conditions. That is, the rates apply to borrowers with excellent credit and spotless documentation. Depending on your circumstances, the rates can—and probably will—be higher.

Go beyond advertisements. Speak to several lenders about your particular financial circumstances, and then compare the loan conditions they offer.

Low APRs can hide high fees

Lenders that offer low APRs often require high upfront fees. Their points requirements, origination fees, and insurance payments might be unusually high in order to justify their lower rates.

If you sell your property too soon after taking on your loan, the high upfront fees and lower APR will cost you more than a loan with fewer fees and a higher APR. Spreading loan payments throughout many years allows you to offset the upfront fees. Know when your break-even point is, and use that to determine if the fees are worth it.

Comparing accurately

When you are seeking a mortgage lender, carefully consider all aspects of the loan. Look at loan structure, rates, and closing costs. Think about how long you plan to remain in the home, as well as whether you prefer to make higher payments up front or defer many of your payments.

To help you compare—and negotiate—present each lender with a competitor’s offer. A good loan officer will review each aspect of the loan and explain how his or her offer fares in comparison. Asking the lender to explain costs, instead of comparing APRs, is a more effective method of determining mortgage costs. Once you are approved for a loan, the APR cannot change by more than 0.125% without the lender disclosing this information.


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