Frequently asked questions
Why is APR higher than the interest rate?
APR includes not just interest but also mandatory fees (origination, points, PMI) spread over the loan term. Since you pay these costs but receive less net proceeds, the effective borrowing cost is higher than the quoted rate. The gap is larger for loans with high fees or short terms.
What is the difference between loaned fees and upfront fees?
Loaned fees are rolled into your loan balance — you borrow more, so your monthly payment increases. Upfront fees are paid out-of-pocket at closing — they don't affect your payment but reduce what you effectively receive. Both increase your true APR, but they affect cash flow differently.
Should I compare loans by interest rate or APR?
Use APR to compare offers because it shows the true total cost. A loan at 6% with 2 points may cost more than 6.25% with no points. However, APR assumes you keep the loan to maturity. If you plan to sell or refinance early, use break-even analysis instead.
Are discount points worth paying?
Each point costs 1% of the loan and typically reduces the rate by 0.25%. On a $300,000 loan, one point costs $3,000 and saves about $50/month. Break-even is about 60 months. If you stay longer, points save money; if you move sooner, they cost you.
Does PMI affect APR?
Yes. PMI increases the effective monthly cost of borrowing, which raises the APR. On a loan with a low down payment, PMI can add 0.2 to 0.5% to the APR depending on the PMI rate and loan size. PMI typically drops off once you reach 78 to 80% LTV.
Why does loan term affect the APR impact of fees?
Fixed fees are spread over the loan life. On a 30-year loan, $3,000 in fees adds about 0.03% to APR. On a 5-year loan, the same fees add about 0.2%. Shorter loans amplify the APR impact of upfront costs, so pay close attention to fees on short-term borrowing.