What Is Mortgage APR?

Written by Shel House of MLS Mortgage Group
Updated June 15, 2021
home exterior with brick porch
Many homebuyers aren't sure what the term mortgage APR means. (Photo courtesy of Angie's List member Jack C. of Powhatan, Virginia)

Many homebuyers wonder what a mortgage annual percentage rate, called mortgage APR, actually is.

While mortgage annual percentage rate — or mortgage APR — isn’t an official term, it is different than APRs outside the mortgage realm and specifies the APR is applicable to home loans. Mortgage APR refers to the second interest rate that’s quoted on home loan documents.

What does mortgage APR really mean?

Here’s the long definition: Mortgage APR is the cost of the loan expressed as a percentage, taking into account various loan charges. One such charge is interest. Other charges used to calculate the APR could include:

• Upfront private mortgage insurance (PMI) for conventional loans

• FHA mortgage insurance premium (MIP) for FHA loans

• VA funding fee for VA loans

• USDA guarantee fee for USDA loans

• Other prepaid finance charges, including but not limited to origination fees, loan discount fees, underwriting fees, processing fees, prepaid interest, administrative fees, lender’s title insurance and other credit costs

The APR is calculated by amortizing these charges — in other words, spreading the charges over the life of the loan. This results in a rate generally higher than the interest rate shown on your mortgage, which is called the Deed of Trust Note in some areas. If the interest were the only finance charge, then the interest or note rate would be the same as the mortgage APR.

So the short definition of mortgage APR is the annualized cost of financing.

Why was mortgage APR created and why is it disclosed?

Mortgage APR was created to assist consumers in comparing mortgage loan options by demonstrating the cost of financing. Mortgage Industry Consumer Protection regulations require disclosing the mortgage APR when quoting an interest rate in order to inform consumers.

What does ‘cost of financing’ mean?

Cost of financing, also known as financing cost or prepaid finance charges, is the cost of obtaining financing. Marc Zirogiannis’ “The ABCs of Homebuying” defines finance charges as: “The amount of interest, prepaid finance charge and certain insurance premiums (if any) which the borrower will be expected to pay over the life of the loan.” 

Upon the close of the loan, the borrower must pay the finance charges, which are defined by the Federal Reserve Board. Non-inclusive examples of finance charges are:

• Loan origination fee

• Points or discount

• Private mortgage insurance

• FHA mortgage insurance or USDA guarantee fee

• Tax service fee

Some loan charges are specifically excluded from the prepaid finance charge such as appraisal fees and credit report fees.

Prepaid finance charges are totaled and then subtracted from the face value of the loan. The net figure is called the amount financed. For example, if you apply for a $200,000 loan that has $4,000 in closing costs, the $196,000 you receive is your amount financed.

The amount financed determines the cost of financing to obtain a new rate. This “effective interest rate” is expressed as the mortgage APR for your home loan.

Is the mortgage APR my interest rate?​

Your monthly mortgage payments are calculated based on your actual interest rate, also known as the note rate. The mortgage APR expresses the costs involved in financing, even though they do not affect your monthly mortgage payment. So despite your mortgage’s interest rate being different than your mortgage annual percentage rate, the mortgage payment remains the same.

This article originally appeared on the MLS Mortgage Group blog.

About this Experts Contributor: Shel House runs MLS Mortgage Group based in Minneapolis with her husband Eric. Shel is happy to assist anyone planning on purchasing or refinancing a home in Minnesota. Follow this contributor on FacebookTwitter and Google Plus.

As of Oct. 20, 2015, this service provider was highly rated on Angie's List. Ratings are subject to change based on consumer feedback, so check Angie's List for the most up-to-date reviews. The views expressed by this author do not necessarily reflect those of Angie's List.