Ask Stacy: What’s the Difference Between Mortgage Rates and APRs?

What's Hot

How to Cut the Cable TV Cord in 2017Family

8 Major Freebies and Discounts You Get With Amazon PrimeSave

8 Creative Ways to Clear ClutterAround The House

Study: People Who Curse Are More HonestFamily

This Free Software Brings Old Laptops Back to LifeMore

Pay $2 and Get Unlimited Wendy’s Frosty Treats in 2017Family

The 3 Golden Rules of Lending to Friends and FamilyBorrow

6 Reasons Why Savers Are Sexier Than SpendersCredit & Debt

Resolutions 2017: Save More Money Using 5 Simple TricksCredit & Debt

Porta-Potties for Presidential Inauguration Cause a StinkFamily

Protecting Trump Will Cost Taxpayers $35 MillionFamily

7 New Year’s Resolutions to Make With Your KidsFamily

5 New Year’s Resolutions That Will Pay Off 10 Years From NowCollege

10 Tasty Alcohol-Free Drinks That Adults Will LoveFamily

10 Simple Money Moves to Make Before the New YearFamily

Could Your Pet Benefit From Marijuana-Laced Treats?Family

Shopping for a house is more fun than shopping for a mortgage, but if you do it right, mortgage shopping isn't that hard and can pay off big time. Here's how.

This week’s question is short, but it’s super important, especially if you’re shopping for a mortgage. Here it is:

To all at MoneyTalksNews,
Thanks for all of the interesting and useful information you share. I was hoping to get a layperson’s explanation of what APR is in regards to mortgages.
— Kerry

While Kerry’s query may appear basic to those with experience, it’s a good question. According to a 2013 survey by Zillow, more than a third of first-time homebuyers don’t know what APR means. (There’s more that first-time homebuyers don’t know, see “Study: People Don’t Understand Mortgage Basics.”)

What’s an APR?

APR stands for annual percentage rate. Here’s the definition from Investopedia:

The annual rate that is charged for borrowing, expressed as a single percentage number that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.

It’s a decent definition, but when it comes to mortgages, it’s not totally right.

Before I explain why, let’s get into a little more detail.

An APR includes fees

Look at a mortgage search, and you’ll note APRs are always either higher or the same as the rate — never lower. Here’s an example from the Money Talks News mortgage search:

Mortgage Rates



The reason APRs can never be lower than rates is because they include the rate and some of the fees involved in securing the loan.

Simple example: Say I lend you $100 for a year at 10 percent interest. At the end of the year, you’ll owe me $110: the original $100, plus $10 interest. But what if I also charge $1 to process the paperwork? In that case, your total cost of the loan would be $11, or 11 percent. In this example, the rate was 10 percent, the APR, 11 percent.

This is why, when it comes to searching loans, most people shop the APR, not the rate, because the APR more accurately reflects what you’ll be paying. Note that I’m saying “more accurately” not “accurately.” That’s because …

The APR doesn’t include all the fees

As I said, the Investopedia definition of APR above is decent, but not exactly right. That’s because they said the APR “includes any fees or additional costs associated with the transaction.” But when it comes to mortgages, that’s not true: The APR doesn’t include all of the fees. And that’s where things get tricky.

While the APR will include fees like discount points (an upfront charge to get a lower rate), mortgage insurance, broker fees, application fees, settlement fees and many others, it doesn’t include everything. Fees for things like appraisals, credit checks, title search, title insurance, and notary and recording fees often aren’t included in the APR. To make matters more confusing, there’s no regulation stating what expenses must be included, which makes apples-to-apples comparisons difficult.

Here are the steps I take when looking for a mortgage:

  • Shop online (start with our mortgage search).
  • Find three to five lenders offering the lowest APRs.
  • Call each lender and ask for a complete listing of every fee.
  • Make a spreadsheet so you can quickly compare offers and pit lenders against one another to get fees reduced or eliminated.
  • Before closing the loan, carefully examine the closing statement to make sure no fees sneak back in and you’re getting what was promised.

Understanding how mortgages work is critical before you start shopping. That means not only knowing about things like APRs, but being prepared to fight back against a blizzard of “garbage” fees. The process may seem intimidating when you start, but it’s not that big of a deal.

Got a question you’d like answered?

A great way to get answers to just about any money-related question is to head to our Forums. It’s the place where you can speak your mind, explore topics in depth and, most important, post questions and get answers. It’s also where I look for questions to answer in this weekly column.

About me

I founded Money Talks News in 1991. I’ve earned a CPA (currently inactive), and have also earned licenses in stocks, commodities, options principal, mutual funds, life insurance, securities supervisor and real estate. Got some time to kill? You can learn more about me here.

Know someone who could use this advice? Then share it on Facebook by clicking the bar below.

Stacy Johnson

It's not the usual blah, blah, blah

I know... every site you visit wants you to subscribe to their newsletter. But our news and advice is actually worth reading! For 25 years, I've been making people richer without making their eyes glaze over. You'll be glad you did. I guarantee it!


Read Next: 14 Ways to Redecorate Your Home for Free

Check Out Our Hottest Deals!

We're always adding new deals and coupons that'll save you big bucks. See the deals to the right and hundreds more in our Deals section.

Click here to explore 1,880 more deals!