Mortgage guides
Mortgage interest rate vs. APR: What is the difference, and how is APR calculated?
Sources and calculations checked:
See how the mortgage payment equation relates interest rates to APR, which fees count, and how to compare borrowing costs.
Terminology guide: check the meanings used in these articles
To make the calculation easy to follow, the formula in this article assumes:
- A fixed interest rate and a single loan advance.
- Equal principal-and-interest payments at the end of each month, fully paying off the loan over its term.
- No monthly mortgage insurance or other ongoing financing charges.
What is the amount financed?
The amount financed is the net credit provided to you or on your behalf after deducting prepaid finance charges, used to calculate APR. It differs from the loan principal you owe and is not necessarily cash handed to you.
| Term | Meaning |
|---|---|
| Loan principal | The debt used to calculate contractual principal-and-interest payments. |
| Amount financed | In the simplified setup below, loan principal minus prepaid finance charges; used in the APR calculation. |
What numbers do you need to calculate the amount financed?
For the simplified calculation in this article, you need two amounts:
- Loan principal P: The principal owed under the loan contract.
- Prepaid finance charges F: The finance charges collected before or at closing, or withheld from the loan proceeds.
Under these simplified assumptions, amount financed = loan principal − prepaid finance charges.
The table below shows which charges count as prepaid finance charges (F).
| Common prepaid finance charges (F) |
|---|
| Prepaid loan origination fees |
| Prepaid underwriting fees charged for obtaining credit |
| Mortgage discount points |
Not all closing costs are prepaid finance charges. Bona fide and reasonable title or appraisal charges may be excluded under applicable rules. Property taxes, escrow deposits and homeowners insurance are not automatically financing charges. A fee’s name alone does not determine its treatment. Regulation Z: Finance charge rules
What is the difference between the interest rate and APR?
The interest rate reflects the cost of borrowing before fees. APR is a broader measure of borrowing costs, expressed as a yearly rate, that includes interest and certain financing charges.
How is APR calculated?
Assume you already know your monthly principal-and-interest payment M. Use the equation from the payment calculation article, but solve for APR instead of the payment.
| Symbol | Meaning |
|---|---|
| M | Known monthly principal-and-interest payment |
| P | Loan principal |
| F | Prepaid finance charges |
| n | Total number of monthly payments |
Keep M and n unchanged and use P − F as the amount financed:
M, P − F and n are known; APR is the only unknown.