You look at two mortgage quotes. Lender A says 6.500%. Lender B says 6.375%. Obvious winner, right?
Not necessarily.
Lender A might charge $2,000 in fees. Lender B might charge $12,000. The note rate — the number you'll actually pay on your monthly statement — is lower at Lender B. But once you amortize Lender B's $10,000 extra in upfront cost over the life of the loan, the APR at Lender B could be higher than Lender A's.
The math
APR is the rate that makes the present value of your monthly payments equal to the loan amount minus the financed fees. This is the Reg Z (Truth in Lending, Appendix J) methodology.
For a $360,000 loan at 6.875% with $7,925 in up-front fees, the APR works out to 7.095%. That extra 0.220% represents the cost of the fees amortized over 30 years.
The practical rule
When you're comparing quotes:
- · **Compare APRs to APRs.** Never note rate to APR.
- · **Compare APRs to APRs at the same lock period.** A 60-day lock is pricier than a 30-day.
- · **Compare APRs to APRs at the same product.** A 15-year note rate is lower than a 30-year; the APRs reflect that.
Use the APR calculator to see how fees actually fold into the rate. The tool uses the same Reg Z methodology your Loan Estimate uses.
One gotcha
APR assumes you keep the loan for the full term. Most people don't — the median mortgage lasts ~7 years before sale or refinance. If you know you'll exit early, compare monthly payment savings over your expected holding period against upfront fees. That's what the refinance break-even calculator does.
Short holds favor low fees, even at higher note rates. Long holds favor lower note rates, even with higher fees.