Every mortgage offer carries two percentages that look alike. One is the interest rate. The other is the APR. They are not the same, and mixing them up is the most common mistake in mortgage shopping.
What is the interest rate?
The CFPB puts it in one sentence. The interest rate “is the cost you will pay each year to borrow the money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan.”
That is the number that drives your monthly payment. On this $320,000 loan at 6.5%, principal and interest come to $2,023 a month. That 6.5% rate would carry an illustrative APR of about 6.59% if the lender charged $3,000 in fees.
What is the APR?
The APR is a wider measure. It “reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan,” spread across the whole term as one yearly rate.
Because it includes those extra charges, the APR is usually higher than the interest rate. On the CFPB’s own sample Loan Estimate, the interest rate is 4% and the APR is 4.617%. The gap comes from $5,851 in loan costs on a $211,000 loan. That sample is an interest only adjustable rate loan the agency built to stress every box on the form, so read the 4% and the 4.617% as a demonstration of the gap, not as typical numbers.
The government form is blunt about the difference. Under the APR figure it prints the caption: “Your costs over the loan term expressed as a rate. This is not your interest rate.”
Where do I find both numbers?
On your Loan Estimate. The interest rate sits on page 1, under Loan Terms. The APR sits on page 3, under Comparisons.
Page 3 also shows the Total Interest Percentage, or TIP. That is “the total amount of interest that you will pay over the loan term as a percentage of your loan amount.” On the sample form, the TIP is 81.18%.
When does APR help?
APR earns its keep in one situation. You have two offers for the same kind of loan, same term, same loan amount, and one has a lower rate but higher fees. APR rolls both into a single number so you can rank them.
That is why the CFPB’s toolkit tells borrowers, “You can use APR and TIP to compare loan offers.”
When does APR mislead?
More often than people think. Three limits matter.
First, APR is not a payment. It is a cost measure spread over the full term. Nobody writes a check for an APR.
Second, APR assumes you keep the loan the whole term. If you sell or refinance in six years, the up front fees hit you much harder than the APR suggests, because you never got the later years of savings.
Third, APR does not include every fee. When the CFPB wrote the current rules, it considered adding title insurance and appraisal fees to the APR and chose not to, saying it “will continue to study the issue.” So two loans with the same total closing costs can show different APRs.
There is one more trap. For an adjustable-rate loan, the CFPB warns that “the APR does not reflect the maximum interest rate of the loan.” Comparing an adjustable loan to a fixed loan on APR alone can point you the wrong way.
What this means for you
Use the rate to understand your payment. Use the APR to compare two similar offers side by side. Never treat one as the other.
Then look past both. Ask each lender for the same points on the same loan, so the fees line up. Check page 3 of every Loan Estimate, not just page 1.
On this loan, one point costs $3,200 and trims about $52 off the monthly payment. Fees like that are exactly what the APR is trying to capture, and exactly what a headline rate hides.
The CFPB’s own advice is short. “Don’t look at the APR alone in determining what loan makes the most sense for your circumstances.”