What is Mortgage APR?
APR stands for annual percentage rate, a way of showing the true cost of a mortgage or other type of loan. It takes into account not only the interest rate you pay, but also the various fees that are charged as part of the loan and expresses them in terms of an annual percentage. That may sound a bit complicated, but this mortgage APR calculator makes it easy to figure out.
Many borrowers make the mistake of focusing solely on the mortgage rate when they go shopping for a home loan. But the mortgage rate is only part of the picture. Closing costs and other fees can significantly affect the total cost of a mortgage. Discount points in particular can reduce your rate but mean much higher costs up front. The mortgage APR takes all of these into account and expresses them in terms of an interest rate.
Mortgage APR is defined as the annualized cost of credit on a home loan. It is the interest rate that would produce the same monthly payment on your loan amount with no fees as you would pay if you rolled all your fees into the loan itself.
For example, suppose you have a 30-year mortgage for $200,000 at 4.5 percent. Your monthly mortgage payments would be $1,013.37, not including property taxes and insurance. Now, suppose you have $6,000 in closing costs and fees and include those in the loan, so you're borrowing $206,000. That would increase your monthly payments to $1,043.77.
Your mortgage APR on this loan is the interest rate that would produce a monthly payment of $1,043.77 on a loan amount of $200,000. That rate is 4.754 percent, which would be your APR on this loan. That's what this mortgage APR calculator can determine for you, in addition to calculating your interest costs and producing a full amortization schedule.
Using the Mortgage APR Calculator
Here's how it works:
- Enter how much you wish to borrow in the "Mortgage Amount" box. Note that you can use the sliders to adjust this amount if you want to see results for a range of figures.
- Enter the length of the loan and the interest rate you expect to pay in the boxes indicated.
- At this point, the Mortgage APR Calculator will show the monthly payment for the loan amount, term and interest rate you have entered.
- Choose "Annually" or "Monthly" for "Report Amortization." This will not affect your results on this page but will determine how your amortization schedule will be shown on the following page, after you click "Show Report" at the top of the page.
- Click "Closing Costs" to expand that section if it is not already visible. Note that you can display or hide different sections of the calculator by clicking the "+" or "–" figures at right.
- Enter the percentage of your loan that will be charged as an origination fee. Note that you can manually enter a decimal amount if your fee is not whole percent.
- If you plan to pay for discount points, enter the number of points you plan to buy here. Note that you can enter negative points, which are used when the lender is covering some costs in return for a higher rate.
- Enter the total of all other fees you will be paying on the loan.
Your mortgage APR will automatically display and be updated by the calculator as you enter or change information. The "Total Payments" chart will show your total interest and principle costs for the life of the loan, while "Principle Balance by Year" will chart the gradual decline of loan principle as you pay the loan off over the term of the loan.
Clicking "View Report" at the top of this page will take you to another page that will explain how your APR figure was arrived at for the loan information you entered. It will also display a payment schedule/amortization table showing how your principle and interest payments will change over the term of the loan, and your accumulated interest and principle payments over time. This will be shown in yearly or monthly increments, depending on the choice you made under "Report Amortization" at #4, above.
Using APR to shop for a mortgage
As noted above, APR provides a more accurate indication of the true cost of a mortgage than simply looking at the mortgage rate. In some cases, mortgage lenders may charge higher fees to offset an unusually low rate they may be offering. APR can help you detect that.
By law, the APR must be disclosed in any loan agreement, including mortgages, and in any advertising for loans that specifies an interest rate. Such advertising for mortgage rates must also include the number of discount points the rate is based on; the more points that are included, the larger the difference there will be between the rate and the mortgage APR.
While mortgage APR is a useful guide for comparing the costs of different loan offers, it does have some shortcomings. Because it is based on annualized cost of fees amortized over the full length of the loan, it will not give a fully accurate picture of costs if you sell or refinance before the loan is paid off.
As a rule of thumb, it's often better to accept higher fees in return for a lower rate on a long-term loan, where you have more time to amortize their cost. But if you're only going to have the loan for a few years, it's often better to minimize fees even if you're paying a higher rate.
Similarly, mortgage APR does not give an accurate comparison of the costs on adjustable-rate mortgages (ARMs) because it cannot anticipate how the rate on the loan may change over time, and does not take into account factors such as the frequency of rate changes and limits on how much rates may be adjusted, which vary from loan to loan.
Why use an APR Mortgage Calculator?
Your lender will figure your APR for you, and will advertise it in loan offers. However, you may wish to see for yourself how your APR will vary if you make certain changes in the loan, such as buying more or fewer points. Or you may want to compare loan offers from lenders with different fee schedules and want to see how different fee schedules affect the APR and total cost of the loan.
It's also helpful if you:
- Are working to a tight budget and need to know exactly how much you can afford
- Want to compare the true total monthly payment required from two or more providers (for the best way to do this, click Get FREE Quote
- Want to double-check that your potential lender is making you a fair offer.