APR is one of those mortgage terms that is supposed to make comparison shopping easier, but it often does the opposite. Borrowers see one interest rate and then a higher APR, and it can feel like the lender is showing two different rates.
The key is this: the interest rate and APR are related, but they're not the same thing.
Interest rate vs. APR
The interest rate, sometimes called the note rate, is the rate used to calculate the principal and interest payment on the mortgage. If you're trying to estimate your monthly payment, this is the rate that matters most.
APR stands for annual percentage rate. It tries to show the cost of credit as a yearly rate after including certain loan costs. Because some costs are included in the APR calculation, the APR is usually higher than the note rate.
Why APR is usually higher
APR includes the interest rate plus certain costs connected to getting the loan. That may include lender fees, points, and other finance charges depending on the loan.
How APR can help
APR can be useful when comparing loans with similar terms. If two loans have the same interest rate but one has a much higher APR, that may be a clue that the higher-APR loan has more included costs.
APR also can help reveal when a very low rate is not quite as attractive as it first appears because the borrower has to pay significant points or fees to get that rate.
Where APR can mislead
APR assumes the loan is kept for the full term. Many borrowers sell, refinance, or pay off the loan before then. If you don't keep the loan long enough, upfront costs, like discount points, may matter more than the APR suggests.
APR also can be less useful when comparing very different loan types, different loan terms, or adjustable-rate features. A 30-year fixed loan and an adjustable-rate mortgage may not be easy to compare using APR alone.
What else to compare
Do not compare mortgage offers using APR alone. Also compare the note rate, monthly payment, total closing costs, lender credits, discount points, cash needed to close, and how long you expect to keep the loan.
APR is a helpful tool, but it's not the whole decision. If you're comparing two loan options and the numbers don't make sense, ask the lender to explain the difference between rate, APR, closing costs, and monthly payment. That conversation usually tells you more than the APR by itself.