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What is APR? Learn the Basics

If you’re shopping for a mortgage, the annual percentage rate (APR) is a good way to compare our mortgage rates against other mortgage lenders.

Interest rate vs. APR – what’s the difference?

You’ll see these 2 terms when you start comparing mortgage rates. While both are expressed as percentages, they have some key differences.

Interest rate

  • What you pay a lender to borrow money as a percentage.
  • When you borrow money for a home, your interest rate will be based on current market rates and other factors, like your loan amount, property location, and credit history. 
  • A lower interest rate typically translates to lower overall mortgage costs and monthly payment. 

Annual percentage rate

 
  • The APR is the cost to borrow money as a yearly percentage.
  • It's a more complete measure of a loan's cost than the interest rate alone.
  • It includes the interest rate plus discount points and other fees. It doesn’t factor in all costs, but lenders are required to use the same costs to calculate the APR.

 First-time homebuyers 

Learn more about buying your first home.

You can lower your interest rate with mortgage points (discount points)

Discount points or mortgage points are a way you can lower your interest rate. They’re prepaid interest costs you or a seller can pay at closing to permanently lower the interest rate.

Here's how discount points work

One discount point costs 1% of your loan amount. While one point will typically reduce the interest rate by less than 1%, even a small interest rate reduction can lower your monthly payment and the amount of interest you pay over the life of a fixed-rate loan. Discount points may also be tax deductible (talk to a tax advisor for details).

Before buying discount points, consider:

  • How much money you can pay upfront - make sure you have enough money to make a down payment, pay closing costs, and still be able to manage other expenses for your new home.
  • How long you plan to stay in your new home - the longer you stay in your home, the more you may be able to benefit from buying discount points.
  • How much can you pay each month - if you don’t have a lot of money to pay upfront and can handle a slightly larger monthly payment, you might be better off not buying points.

Transcript: What is APR?

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A loan's Annual Percentage Rate, or APR, is the cost of your mortgage credit as a yearly rate.

Your Annual Percentage Rate is typically higher than your interest rate because it includes your interest rate plus certain fees, such as lender and mortgage broker fees, based on the specific characteristics of your loan.

The interest rate shows what percentage of your loan amount you will need to pay every year, over the life of your loan.

One type of fee often included in the APR is discount points.

Discount points are up-front charges paid to the lender voluntarily, usually by the borrower or seller, to reduce the interest rate. One point is equal to 1% of the principal amount of the mortgage.

Paying discount points can be advantageous if you have an extended loan term and you plan to stay in your new home for a while.

Applying for a loan isn't free. Another fee included in the APR is the amount the lender charges to process the loan application.

You'll hear this charge referred to as the "origination charge" and it includes any application, processing, and underwriting fees. These fees and charges vary. Typically the buyer pays the majority of the origination charge, but you can negotiate with the seller in your offer.

Lenders will approximate all the expected fees and charges in a disclosure document called the Loan Estimate, which estimates the total cost of the transaction.

As you can see, many variables can affect the cost of a loan, and it is important to look at not only the monthly amount you will pay, but the overall amount as well.

Wells Fargo Home Mortgage is a division of Wells Fargo Bank, N.A. 
© 2014-2022 Wells Fargo Bank, N.A. NMLSR ID 399801.

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