What is APR

When it comes to finding the best deal on a mortgage, many people understandably focus on interest rates. Interest rates are important, of course, but the annual percentage rate (APR) can give you a clearer picture.

The interest rates you see advertised by different lenders are often based on other factors that you don’t see, like the cost of discount points. That makes it hard to do an apples-to-apples comparison based on interest rates alone.

This is where the annual percentage rate (APR) comes in. The APR takes all the standard borrowing costs—including discount points, closing costs, and the interest rate itself—and shows them as a simple percentage. It doesn’t include every possible mortgage cost, but all lenders are required to use the same costs to calculate the APR. That means you get a more complete measure of the loan price, and a more reliable way to compare deals from different lenders.

The annual percentage rate includes multiple borrowing costs, including the interest rate, discount points, and closing costs.

Interest rate. The interest rate is the cost to borrow money expressed as a yearly percentage. It’s based on the principal amount of the loan and is used to calculate the monthly mortgage payment. The interest rate is the largest component of a loan’s annual percentage rate.

Discount points. You can think of discount points as a form of prepaid interest—you pay extra money at closing in exchange for a lower interest rate over the life of your loan. Generally, the longer you plan to stay in the home, the more sense it makes to pay discount points up front, because the money you save each month by having a lower rate adds up over time. One discount point equals one percent of the loan amount, and the cost is built into the APR.

Closing costs. Aside from your down payment, the up-front expenses required for a mortgage are referred to as closing costs. These can be paid by the buyer, the seller, or the lender (or a combination of all three). Closing costs include lender fees, third-party fees, and title fees, which are all part of the annual percentage rate.

There are many factors that influence the cost of borrowing money. Some of those factors are outside your control (like the financial markets), but there are things you can do to influence how good an APR you can get.

Improve your credit. A better credit score could help you get a lower interest rate, which is the largest component of your APR. So be sure to review your credit report and address any issues you can.

Reduce your debt. As part of determining your interest rate, lenders will examine your debt to determine the risk associated with you taking on another payment. They use a calculation called debt-to-income (DTI) ratio. While debt isn’t necessarily viewed negatively on a loan application, you’ll want to ensure your total debt doesn’t exceed a certain percentage of your income. Having a DTI ratio of 35% or less is a good rule of thumb.

Consider using discount points. Discount points can lower the overall cost of the loan—and thus the APR—by reducing the interest rate in exchange for additional cash up front. If you don’t need the money for other expenses and plan to stay in the home for a while, paying points could be a good move.

Within days of submitting your loan application, you should receive a written loan estimate for each product you explore from every lender you shop. The APR is printed on the loan estimate. All lenders use a similar format, which can make it easier to find and compare the APR and loan details you receive from different lenders.

At Wells Fargo, your home mortgage consultant will even refresh this information should things change while you’re still exploring your options or searching for a home. This helps you have the most up-to-date APR quote handy when you’re ready to compare loans and offers. A Wells Fargo home mortgage consultant can help you find the right mortgage loan and guide you through all your options so you can make the best choice possible