What are APR fees on a mortgage?

The terms “interest rate” and “annual percentage rate” (APR) are often used interchangeably, but they aren’t quite the same. It’s not uncommon for buyers to focus on the interest rate, but the APR may be the more important term to understand if you’re shopping for a mortgage or looking to refinance. Because you’ll be on the hook for APR fees, the APR gives you a better idea of all-in yearly cost of the loan. In other words, it also includes some, but not all, of the other fees you’ll have to pay when you get a mortgage.

What are APR fees?

“When looking for a mortgage, it is necessary to compare the APR for the same type of loan, understand all the fees and to make sure the mortgage payment aligns with your financial goals,” says Judy Brown, senior financial adviser at Berman McAleer in Timonium, Maryland.

Don’t confuse the APR with the interest rate, though. Although they are both percentages, the mortgage interest rate is the cost of borrowing before including the fees and other charges. Since the APR includes these additional fees, the APR is always higher than the interest rate.

It can be helpful to think of the interest rate as the rate the lender uses to calculate the monthly interest on your mortgage. The APR, on the other hand, includes both the interest rate and some of the fees you pay, so it’s meant to be a truer reflection of the total cost of the loan.

When comparing mortgage offers, you can find the APR costs on the loan estimate document provided by your lender, on page three in the “Comparisons” section.

Keep in mind, though, that not all charges are always included.

“Unfortunately, lenders are not required to include all fees in their calculation of APR,” says Ben Simiskey, founder and owner of PLS Advisory, LLC, in Houston, Texas. “So, it’s important for the borrower to clarify with prospective lenders exactly what fees they are including in their APR calculation.”

So, what does APR include? Here’s a closer look at which fees are typically included in APR — and which aren’t.

What fees are included in APR?

Mortgage lenders generally include the following fees in APR calculations:

• Discount points — You might buy these points to reduce your interest rate. 
• Mortgage broker fees — This is the amount you pay your mortgage broker to help you get your home loan established. 
• Transaction fees — Some mortgage lenders charge fees for initiating your loan. These might be included in closing costs (more on that below) or separated out. 
• Private mortgage insurance (PMI) — If you put less than 20 percent down, your lender will likely require you to get insurance to cover them if you default on your loan. 
• Prepaid interest — This is the interest that accrues between the closing date of your loan and the date your first mortgage payment covers. 
• Escrow and settlement fees — These are APR costs you owe to the escrow company. 
• Origination fees, like underwriting, application, processing and document preparation fees — Lenders can charge you to evaluate your loanworthiness and initiate your loan. 
• Credit report fees — Lenders will incur a charge to get your credit score. They usually wrap this into your APR fees.  
• Certain closing costs — These are fees in APR calculations that get incurred to finalize your loan.

What fees are not included in APR?

Now that you know what is included in APR calculations for most mortgage lenders, here are some fees that aren’t usually factored in:

• Title examination fees — Your lender will generally charge you to search the title of your future home, but they might not wrap that into your APR. 
• Title insurance fees — Similarly, if you need to buy title insurance, that generally won’t be folded into APR costs. 
• Property survey fees — If you need to get your property surveyed, don’t assume that will be covered in your APR.
• Document preparation fees — While some lenders include these fees in APR, others don’t. 
• Notary fees — You’ll need to get your loan notarized, but you’ll usually pay the notary, not the lender. 
• Property appraisal fees — The lender requires you to get the property appraised to make sure your loan makes sense, but they may not include this as one of the fees in APR calculations. 
• Transfer taxes — Not all buyers need to pay a tax to get the property title transferred to them, so this usually isn’t factored into APR. 
• Pest inspection fees — Need to check for termites, rats, etc.? You’ll generally pay the inspection company, not the lender. 
• Flood hazard inspection fees — Not all home purchases will require a flood inspection, so this usually doesn’t count toward APR fees.

Does APR include closing costs?

Yes, APR does include most closing costs you’ll incur when buying a new home. You can find a breakdown of these costs on page three of the loan estimate provided by your lender prior to closing.

Example of APR fees

Say Nico makes an offer on a home and is comparing the costs of 30-year, fixed-rate mortgages. He needs a mortgage for $250,000.

One lender offers him a loan with an interest rate of 6 percent. Nico knows that percentage doesn’t reflect what the loan will really cost him.

So, Nico looks at the fees the lender included in the APR:

• Origination fee (1% of loan principal): $2,500
• Discount points (1% of loan principal): $2,500
• Other closing costs: $800

These additional loan costs come to $5,800. Based on that, Nico uses Bankrate’s annual percentage rate calculator to determine the APR. (For an adjustable-rate mortgage, he would use this APR calculator for ARM loans).

He adds the additional loan costs to his loan total, and finds that even though the quoted interest rate is 6 percent, the APR, which includes the additional fees, is 6.215 percent.

Bottom line

There are different ways to calculate APR, so it’s best to clarify with your lender exactly which fees are in fact included in a quote. This helps you to know whether you’re making apples-to-apples comparisons between mortgage offers and gives you specific information you can use if you want to negotiate some of the fees before closing on the loan.