A mortgage advertised at 6.5% will typically show an APR of around 6.72%. Both numbers are correct and they answer different questions.
The interest rate is what the payment is calculated from. The APR folds the up-front costs into a single annualised figure so two offers can be compared.
Which one builds your payment
The monthly payment comes from the interest rate, the balance and the term — nothing else. On a $400,000 loan at 6.5% over 30 years, the principal and interest payment is about $2,528, and the APR does not enter that calculation anywhere.
So if you are asking "what will I pay each month", the interest rate is the number. If you are asking "which of these two offers is cheaper", the APR is.
What goes into the APR
Broadly, the costs you pay to get the loan:
- origination and lender fees
- discount points
- mortgage broker fees
- some closing costs, where the lender requires them
- mortgage insurance, where it applies
What is left out
- Property taxes and homeowner's insurance — real costs, and often half again on top of the payment, but not lender costs
- Title insurance and most third-party fees you could shop for yourself
- Appraisal fees, in most cases
- Anything after closing
Which is why the APR is a comparison tool between loan offers, not an estimate of what owning the house costs.
The mistake APR is designed to prevent
Two offers on the same $400,000 loan:
| Lender A | Lender B | |
|---|---|---|
| Rate | 6.25% | 6.5% |
| Points and fees | $9,000 | $1,500 |
| Monthly payment | $2,463 | $2,528 |
| APR | ~6.44% | ~6.53% |
Lender A has the lower rate and the lower payment, and looks better on both. The APR narrows the gap because the $9,000 has to be paid.
The break-even is what settles it: $65 a month saved against $7,500 more paid up front is about 115 months — nearly ten years. If you might move, refinance, or pay the loan off before then, the higher-rate offer is genuinely cheaper.
Where APR gives the wrong answer
APR assumes you hold the loan for its full term. Almost nobody does — the average mortgage is refinanced or repaid within about a decade.
Because it spreads up-front costs over 30 years, APR systematically flatters loans with high fees and low rates. The shorter your realistic horizon, the more the comparison misleads, and the more the break-even calculation is the one to run instead.
Credit cards are a different animal again
A credit card APR contains no fees at all, because the fees are charged separately. It is simply the annualised interest rate, and dividing by 12 gives the monthly periodic rate.
Cards also carry several APRs at once — purchases, balance transfers, cash advances — and payments are generally applied to the lowest-rate balance first above the minimum. Which is how a card carrying a 0% transfer balance and a 26% cash advance balance can be paid down for a year with the expensive part barely moving.
Reading a quote properly
Ask for the rate, the APR, and the total up-front cost in dollars, all three, from every lender on the same day. Rates move daily, so quotes gathered across a week are not comparable.
Then run the break-even yourself: the extra cash paid at closing, divided by the monthly saving. If that number of months is longer than you plan to keep the loan, take the cheaper closing and the higher rate.