Mortgage answers / Mortgage basics
APR vs. interest rate: why the lower APR isn't always the better deal
The rate sets your payment. The APR is supposed to let you compare offers — but it makes one assumption that's wrong for most people, and it quietly punishes the cheaper loan.
Two lenders quote you the same 6.5% rate. One shows an APR of 6.61%, the other 6.74%. Take the lower one, obviously.
Maybe. It depends entirely on how long you keep the loan, and nobody tells you that.
What each number actually is
The interest rate is simple: it’s what determines your monthly principal and interest payment. That’s it. It’s the number you’ll live with.
The APR — annual percentage rate — is a disclosure invented to stop lenders hiding costs. It takes the rate, folds in the lender’s cost of credit, and re-expresses the whole thing as one annualised percentage. Origination fees, discount points, mortgage insurance, some third-party costs. The idea is that a single number lets you compare two offers honestly.
It’s a good idea. It just carries an assumption.
The assumption that breaks it
APR assumes you keep the loan for its full term. Thirty years, every payment, no sale, no refinance.
Almost nobody does that. People move. Rates fall and they refinance. Life happens. The median homeowner is nowhere near thirty years into the same mortgage.
That matters because APR spreads upfront costs across the entire term. Pay $6,000 in points today and APR quietly amortises that over 360 months to make it look small. If you sell in year six, you didn’t get 360 months of benefit — you paid $6,000 and got 72 months of it.
So the loan with the lower APR is often the loan with higher upfront costs and a slightly lower rate. That’s a good trade if you keep it forever, and a bad one if you don’t.
How to actually compare two offers
Ignore the APR for a moment and do this instead.
- Line up the two Loan Estimates side by side. Page 2, section A through C. That’s what you’re actually paying to get the loan.
- Work out the difference in cost, and the difference in monthly payment.
- Divide one by the other. Cost difference ÷ monthly saving = the number of months before the more expensive loan pulls ahead.
- Compare that to how long you’ll realistically be in this loan. Not the term. How long you will keep it.
If the break-even is 41 months and you’re planning to sell in three years, the cheaper-upfront loan wins — even though its APR looks worse.
Where APR still earns its place
It’s genuinely useful for catching a lender who quotes a beautiful rate and buries the cost in fees. If two offers show the same rate and one has a materially higher APR, that gap is real money and you should ask what’s in it.
Use it as a smell test. Don’t use it as a decision.
What I’d actually ask for
When you’re comparing lenders, ask each one for the same thing: a quote at the same rate, with the costs broken out. Not “what’s your best rate,” which invites everyone to quote you something with points baked in and let the APR sort it out later.
Once the rate is fixed across all your offers, the only variable left is cost — and then you’re comparing something real instead of comparing two different bets about your future.
That’s the conversation I’d rather have with you anyway. Send me a Loan Estimate from anyone else and I’ll walk through it line by line, including the parts that make me look worse.
