Mortgage Annual Percentage Rate (APR) Calculator

What is an Annual Percentage Rate (APR)?

The Annual Percentage Rate (APR) represents the effective interest rate when considering a mortgage. It incorporates both your quoted (nominal) mortgage rate and any fees associated with the mortgage. Fees can include broker fees, closing costs, rebates, or discount points. If you have any closing costs and no interest rebates, the APR will always be greater than the quoted mortgage rate.

You should always try to find the lowest APR when comparing mortgage loans because it includes all costs. If two lenders are offering the same mortgage rate, but one of them has higher closing costs, it will be reflected in a higher APR. The best way to learn what goes into an APR is to calculate it yourself. You should not use the APR without understanding it because the APR may be misleading under the following circumstances:

• Fluctuating Interest Rates: While the APR is useful for comparing different lenders, it assumes that your interest rate will remain fixed throughout your entire mortgage term. However, if you have a variable interest rate, your mortgage rate can change, which causes your APR to change. Variable interest rates often fluctuate with the US Federal Reserve (Fed Funds) interest rate, so you should consider how a change in the Fed Funds rate could affect your APR.
• Mortgage Refinancing: If you decide to refinance your mortgage or otherwise get rid of your mortgage early, the APR will not be exact. When calculating the APR, closing costs and other up-front mortgage fees are distributed throughout the lifetime of the mortgage. But since you pay these costs immediately, getting rid of your mortgage early would ignore some portion of it.

How to calculate APR?

The APR is considered the true cost of a mortgage because it includes any closing costs and mortgage fees as part of the principal amount. Essentially, these fees are "rolled into" your mortgage principal. The easiest way to calculate your mortgage APR is to use a combination of calculations and the Excel PMT/RATE functions.

• Step 1: Add your mortgage fees to the principal amount. This will be used to calculate a monthly mortgage payment that includes mortgage fees and is how we include mortgage fees in the percentage rate.
• Step 2: Divide your annual interest rate by 12. This turns your annual mortgage rate into a monthly mortgage rate. Generally, mortgages charge interest every month.
• Step 3: Find your monthly payment by using the Excel function, PMT, as follows:
= PMT(Result from Step 2, Loan Term in Months, Result from Step 1)
• Step 4: Find the monthly percentage rate by using the Excel function, RATE, as follows:
= RATE(Loan Term in Months, Result from Step 3, Principal Amount)
With this, we can compare the mortgage payment with mortgage fees to our mortgage principal.
• Step 5: Multiply your result from Step 4 by 12 to get your APR.

Alternatively, you can use our built-in calculator to perform this calculation automatically

Mortgage Interest Rate vs APR

Mortgage Interest Rate: When you look at online lending websites or mortgage ads , they will often display a mortgage interest rate. This mortgage rate often fluctuates with the Fed Funds rate, but is always a couple percentage points higher. Currently, the Fed Funds rate is 0-0.25% and today's best mortgage rates are about 2-2.25%. Your quoted mortgage rate is used to calculate your interest expense for each month. To find your monthly mortgage rate, you can simply divide your quoted mortgage rate by 12.

Annual Percentage Rate (APR): On the other hand, your APR is the actual cost of getting a mortgage. The APR and mortgage rate are very similar, but each monthly payment includes a small portion of your closing costs and upfront mortgage fees. The APR is the interest rate that would be charged on a loan with all closing costs included as part of the principal amount. This helps you compare different lenders because it accounts for all lender-related costs.

Which to Use: When searching for a mortgage, you should use the APR. Nearly all mortgage rate sites and lenders will show you both a quoted mortgage rate and an APR. When comparing mortgage lenders, the APR paints a much clearer picture of the cost of financing the mortgage. However, the APR is imperfect because it often excludes optional mortgage insurance or lender-specific fees. To accurately compare mortgage lenders, you should collect any mortgage fees and then calculate the APR on your own.

What to Include in APR

Your mortgage rate determines only your interest payment costs. To calculate APR, you'll need to include all the costs associated with your mortgage loan. Things to include when calculating your mortgage APR are:

• Mortgage interest
• Mortgage origination points/mortgage origination fees
• Cost of mortgage discount points
• Private mortgage insurance
• Legal fees
• Mortgage broker fees
• Most closing costs

What Not to Include in APR

There are a few fees and closing costs that you do not include when calculating APR. That's because APR fees should be related to the cost of getting the mortgage. This means that buyer closing costs associated with a home purchase wouldn't necessarily be included in an APR calculation. Costs that are usually not included in a mortgage APR include:

• Title insurance
• Cost of getting a credit report
• Home appraisal
• Home inspection
• HOA fees
• Notary fees

How to Use This APR Calculator

This APR calculator finds your mortgage's annual percentage rate and monthly payment based on a few inputs. To use this calculator, you will need to enter the following:

• Mortgage Amount: This is how much you are borrowing
• Quoted Interest/Mortgage Rate: This is the interest rate that your mortgage lender uses to calculate your interest payments
• Mortgage Term: This is the amount of time that it will take you to pay off your mortgage loan
• Mortgage Fees: These are fees that your lender is charging you, such as closing costs associated with the mortgage loan

Using this information, you'll be able to find out your monthly mortgage loan payment and your mortgage's APR.

What Affects Your APR?

An increase in some closing costs included in APR calculations and other fees charged will mean that your APR will be higher. Your APR will also be higher if your mortgage interest rate is higher. You might have a higher mortgage rate based on your income, credit score, existing debt, how much you are borrowing, and the size of your down payment. Borrowers that have a high credit score and high income will generally be able to get mortgages with a lower APR. Mortgage rates also vary from lender to lender, which is why you should compare APR between mortgage lenders.

Using APR to Compare Mortgage Offers

Using APR lets you easily compare mortgage loan offers between different lenders that have the same mortgage term, but it's not always the best way to compare mortgages. That's because closing costs and lender fees are all rolled into APR based on the mortgage's term length. If you don't plan on sticking with the entire mortgage term, such as if you plan on selling the home or paying off the mortgage early, then the APR won't be accurate.

Lenders that have low mortgage rates but high closing costs will have a lower APR compared to lenders that offer higher mortgage rates with low closing costs. That's because interest generally takes up the bulk of a mortgage's APR. However, if you plan on selling your home or paying off your mortgage early, it might be a better idea to choose the lender with lower closing costs but a higher APR.

For example, let's take a look at a mortgage with a $500,000 principal for a 30-year term. Lender A is offering a fixed mortgage rate of 3% and charges $25,000 in fees, while Lender B is offering a fixed mortgage rate of 3.5% but charges only $5,000 in fees. Which mortgage would be better?

With a 30-year term offer, you'll be presented with an APR of 3.39% for Lender A and an APR of 3.58% for Lender B. However, as the table above shows, the actual APR will change based on how long you keep the mortgage for. If you will pay the mortgage over 30 years, it's better to go with Lender A.

If the mortgage won't last the entire term length, then the offer from Lender B starts to become more attractive. If you pay off the mortgage after 15 years, the actual APR that you'll be paying is 3.71% with Lender A but only 3.65% with Lender B. It's cheaper to get a mortgage with Lender B for 15 years even though they had a higher APR in the first place. This difference becomes even more clear for shorter terms. For example, if you'll move and pay off your mortgage in five years, the lower closing costs from Lender B makes it have a much lower APR compared to Lender B.

Instead of relying on the APR value that your lender gives you, it is a good idea to calculate APR yourself based on your plans and goals. If you plan on moving every five years, you'll want to calculate APR based on 5-year terms, rather than the actual amortization length of the mortgage. Closing costs will need to be paid every time you get a new mortgage, which makes it important to tailor your APR calculation to fit your own unique situation.