Annual percentage rate represents the total yearly cost of your loan amount, expressed as a percentage. APR includes the interest rate plus certain upfront and ongoing loan costs spread over the life of the loan.  

Due to the Truth in Lending Act, lenders are required to disclose details like credit card APRs, origination fees, yearly interest rates on car loans and, of course, compounding interest for mortgages.  

When you compare APR vs. interest rate, the annual percentage rate will be higher because it outlines what you effectively pay when fees are factored in.

Annual percentage rate is shown as a single percentage number, which can help you compare loans side by side. APR works by factoring in additional fees that impact your monthly payments, such as closing costs and origination fees. It almost always comes in higher.

APR works by combining interest with specific loan costs and spreading them over the full loan term. This helps borrowers see beyond just the advertised rate and better understand long-term costs.  

Adding annual percentage rate to all of the other numbers associated with your mortgage, such as compounding interest, credit scores, interest rates and financial data, can make first-time buyers feel overwhelmed.  

This is why it’s important to slow down and look at how each number fits into the bigger picture. No single figure tells the whole story and understanding how they work together can help you feel more confident and prepared during the mortgage loan process. 

APR, including certain fees, may account for:  

• Origination fees 

• Underwriting fees 

• Discount points 

• Some closing costs 

Not all costs are included. For example, lenders do not factor your property taxes, homeowners insurance or appraisal fees into APR calculations.

Annual percentage rate is calculated based on your loan amount, interest rate, loan term and qualifying fees. Those costs are averaged out over the life of the loan and added to the interest calculation. The purpose is to provide a true representation of what you will pay to borrow money.

Interest rate reflects the cost of borrowing the principal loan amount, before any fees are accounted for. APR includes the interest rate plus additional fees and is expressed as an annual rate

The annual percentage rate includes fees aside from the nominal interest, including origination costs and discount points. Therefore, it’s typically higher than the interest rate alone. The more fees you incur during a loan, the larger the gap between the two numbers. Typically, you should expect the APR to be somewhere between one-half point to a full point higher than the interest rate, but that can vary.

Both matter, but in different ways. If you’re focused on monthly payments, the interest rate plays a bigger role. If you want to know the total cost of borrowing, APR provides a broader view.  

Your personal goals should guide which figure you prioritize. For example, buyers planning to stay in a home long term may place more value on total loan cost, while those expecting to move sooner may focus on affordability today. Understanding how each number aligns with your timeline can help you make a smarter choice.

The Truth in Lending Act requires mortgage lenders to disclose what your APR will be on a loan. You will sign multiple documents acknowledging that you know what it is. The law was created to protect you from predatory lending and help you make informed financial decisions.

Suppose that you receive two loan offers. You can compare the interest and annual percentage rate for each loan option to determine which one is a better fit for you. This can be especially helpful if the loan structures differ. For example, one option may be a conventional loan, and the other may be an FHA mortgage loan.

The reality is that most borrowers are more concerned with their interest rate, rather than the annual percentage rate. However, there are times when you need to take a closer look at your APR.

The annual percentage rate is most useful when comparing loans that are otherwise similar. In most cases, the interest rate will have the biggest impact on what you pay. However, you should pay more attention when: 

• Loan amounts are similar 

• Loan terms are the same (e.g., 30-year fixed) 

• You’re choosing between lenders offering comparable loan products 

In these cases, the APR can help you identify which loan will cost you less over time. 

The annual percentage rate is not very helpful when: 

• You plan to sell or refinance quickly 

• Loan structures differ greatly  

• You’re comparing short-term and long-term loans  

Since APR assumes you’ll keep the loan for its full term, it may not reflect your real-world costs if you plan to make a change.

Lenders use the score on your credit reports to assess risk and determine your interest rate. If you have a stronger credit profile and a higher score, you may qualify for a lower interest rate and fewer fees.  

Improving your credit before applying — even modestly — can influence the offers you receive. Paying down balances, correcting errors on your reports and avoiding new credit inquiries may help position you for more favorable terms when it’s time to lock in a loan. 

RELATED: What Credit Score Is Needed to Buy a House?

Not always. It may be lower if fewer fees are being rolled into your loan. However, this may also mean that you are paying more out of pocket to get the deal done.

APR is one of the most important tools available to you when comparing mortgage options. Now that you know how the annual percentage rate works, you can make an informed decision during your borrowing process.  

Taking the time to review disclosures, ask questions and compare offers side by side can help you avoid surprises later. A little clarity upfront can make the entire home financing experience feel far more manageable.