APR Calculator
Interest rates don't tell the full story. This calculator computes the true Annual Percentage Rate (APR) by including all fees and closing costs in the calculation.
How APR Differs from Interest Rate
The interest rate is the cost of borrowing expressed as a percentage of the loan amount. If you borrow $100,000 at 5%, you pay $5,000 per year in interest (before compounding). Simple and straightforward.
APR takes that base rate and adds the cost of fees spread over the loan term. Suppose you pay $3,000 in origination fees on that $100,000 loan. Those fees reduce the actual cash you receive to $97,000, but you still repay $100,000 plus interest. The APR calculation treats this as if you're paying a slightly higher interest rate to account for the fees.
Federal law requires lenders to disclose APR on most consumer loans. This standardizes comparisons so borrowers can evaluate offers from different lenders on equal footing. Always compare APR to APR, not interest rate to APR.
Breaking Down Common Loan Fees
Origination fees, typically 0.5-1% of the loan amount, cover the lender's processing costs. Discount points, where each point equals 1% of the loan, let you buy down the interest rate in exchange for upfront cash. Both are included in APR calculations.
Mortgage insurance premiums, required on loans with less than 20% down, appear in APR for the period you're required to pay them. Upfront MI premiums are fully included; monthly premiums are factored in based on how long they're expected to last.
Not all closing costs count toward APR. Title insurance, attorney fees, and appraisals are third-party costs outside the lender's control, so they're excluded. This can create confusion because your closing disclosure might show $8,000 in total costs while APR only reflects $4,000 in lender fees.
Using APR to Compare Loan Offers
When shopping for a mortgage or large loan, you'll receive Loan Estimates from each lender showing interest rate, APR, monthly payment, and closing costs. The APR line is the key comparison point because it factors in both rate and fees.
A lender advertising 4.25% might charge $6,000 in fees, resulting in a 4.45% APR. Another lender offers 4.375% with $2,000 in fees and a 4.42% APR. The second loan has a higher interest rate but lower APR, meaning it costs less overall. You'll pay slightly more per month but save on upfront costs.
Be cautious with no-closing-cost loans. They often roll fees into a higher interest rate, which increases APR. If you plan to stay in the home or hold the loan for many years, paying upfront fees for a lower rate usually beats no-cost options. If you'll refinance or move within a few years, no-cost loans might win.
Frequently Asked Questions
What is the difference between interest rate and APR?
Interest rate is the percentage charged on the principal. APR includes the interest rate plus all mandatory fees (origination fees, points, closing costs) expressed as an annual rate. APR is always equal to or higher than the interest rate.
Why is APR important when comparing loans?
APR reveals the true cost of borrowing. A loan with a 4% rate but $10,000 in fees might cost more than a 4.5% rate with $2,000 in fees. APR accounts for both, making it the best metric for comparing offers.
What fees are included in APR?
Lender fees like origination fees, underwriting fees, processing fees, discount points, and mortgage insurance premiums. Excluded are title insurance, appraisal fees, and third-party costs not controlled by the lender. Rules vary by loan type.
Does APR reflect early payoff?
No. APR assumes you hold the loan for the full term. If you refinance or sell in a few years, the effective rate is higher because you paid all the upfront fees but didn't spread them over the full term.
Is a lower APR always better?
Usually, but not always. Sometimes lenders offer low APRs with high monthly payments or prepayment penalties. Compare APR, monthly payment, total interest, and loan flexibility to find the best overall deal.