Mortgage rate versus APR: the comparison that keeps fees honest

What the interest rate tells you

The note rate is the interest rate used to calculate interest on the loan. With a fixed rate mortgage, the rate does not change during the term. The principal and interest payment remains steady, though taxes and insurance can change.

The rate matters, but it does not show every cost required to obtain the loan. Two offers can display the same rate and carry different points, lender fees or credits.

What APR adds to the picture

APR expresses the interest rate and certain finance charges as an annualized percentage. It can make fee differences easier to spot when comparing similar loans.

APR is not the amount paid each month, and it relies on assumptions about how long the loan remains outstanding. Use it as a comparison tool, then inspect the actual dollar costs on the Loan Estimate.

Rate tells you about interest. APR helps expose the price of getting that rate.

Put points through a break even test

One discount point costs one percent of the loan amount. Paying points can reduce the rate, but the buyer gives up more cash at closing.

Divide the cost of the points by the monthly payment savings for a simple break even estimate. If the result is 48 months and you expect to refinance or sell sooner, the upfront cost may not have time to pay back.

• Keep the loan amount and term the same.
• Compare the points in dollars, not only as a percentage.
• Include lender credits that offset costs.
• Test more than one expected holding period.

Compare the same lock period and timing

Rates can change during the day. A valid comparison needs the same date, time and lock period. One quote with a 30 day lock and another with a 60 day lock are not identical offers.

A rate lock protects agreed pricing for a defined period. The closing plan should fit inside that period, with room for the appraisal, underwriting and final conditions.

Use the Loan Estimate as the scoreboard

Review the rate, APR, points, lender credits, projected payment, cash to close and costs over the first five years. Those fields reveal the tradeoff in dollars.

Then match the math to the plan. The lowest upfront cost may suit one buyer. The lowest monthly payment may suit another. The strongest answer is the one that supports the expected time in the home and the cash that remains after closing.