APR vs interest rate
The interest rate is what the lender charges on the balance. The APR (annual percentage rate) is the interest rate plus the fees you pay to get the loan — origination, underwriting, processing, discount points — expressed as one annual rate. Federal law requires lenders to disclose it for exactly this reason: a 7.25% loan with $6,000 of fees can cost more than a 7.4% loan with $1,500 of fees, and the APR is the number that shows it.
This calculator solves for the APR the way a lender's disclosure does: it finds the rate at which the net amount you actually receive (loan minus fees) produces the same monthly payment you are contractually paying. It is accurate for fixed-rate loans; for ARMs the disclosed APR is based on assumptions about future rates.
How to use it when comparing two offers
- Take the interest rate, term and lender fees from each Loan Estimate (section A on a mortgage estimate). Third-party costs like appraisal and title are the same regardless of lender and can be left out when comparing.
- Enter discount points as a percentage of the loan. One point is 1% of the loan amount paid upfront to lower the rate, typically by about 0.25 points.
- Compare the APRs. If you expect to sell or refinance within a few years, also look at total fees: a low-APR loan with high upfront fees only wins if you keep it long enough.
| $300,000, 30 years | Rate | Lender fees | APR | Payment |
|---|---|---|---|---|
| Offer A | 7.25% | $6,000 | ≈7.45% | $2,047 |
| Offer B | 7.40% | $1,500 | ≈7.45% | $2,077 |
Over 30 years the two offers above cost almost the same; over five years Offer B costs less because you never recover A's $4,500 of extra fees. The "months to recover points" result shows that break-even for discount points specifically.
For what a rate change does to your payment, use the Rate Shock Calculator. For a plain-English walkthrough of APR, points and fees, read Understanding APR vs Interest Rate.