Week 10, Day 63
Understand the difference between APR and interest rate to accurately compare Nevada mortgage offers and find your true loan cost.
The interest rate is what you pay to borrow money—it's the percentage charged on your loan principal and determines your monthly payment.
APR (Annual Percentage Rate) is the total cost of the loan expressed as a yearly rate. It includes the interest rate PLUS closing costs, origination fees, mortgage insurance, discount points, and other lender fees spread over the life of the loan.
Key Takeaway:
Interest rate = what you pay monthly. APR = true total cost of the loan. Always compare APR when shopping Nevada mortgages—not just the interest rate.
| Interest Rate | APR | |
|---|---|---|
| What it represents | Cost to borrow the principal | Total cost including fees |
| Includes | Only interest charges | Interest + origination fees + discount points + mortgage insurance + lender fees |
| Determines | Your monthly payment | True cost over loan life |
| Which is higher? | Lower number | Higher number (includes fees) |
| Use for | Calculating monthly budget | Comparing total loan costs between lenders |
Which is Better?
Lender A has a lower APR (6.75% vs 6.82%) even though its interest rate is higher. This is because Lender B's higher closing costs increase the true cost over time.
Winner: Lender A saves you more money over the life of the loan despite the higher monthly payment ($65/mo difference = $23,400 over 30 years, but you pay $6,500 less upfront).
Most lenders charge an origination fee (typically 0.5%-1% of loan amount) to process your application. This cost is built into APR but not the interest rate.
Example: $400,000 loan with 1% origination = $4,000 fee added to APR calculation
If you buy discount points to lower your interest rate, those upfront costs increase your APR even though your monthly rate is lower.
Example: Pay $4,000 in points to drop rate from 6.5% to 6.25% — your APR will be higher than 6.25% due to the points cost
FHA loans include upfront mortgage insurance premium (1.75% of loan) rolled into the loan, which increases APR significantly above the interest rate.
FHA Example: 6.5% rate might show 6.95% APR due to upfront MIP
Application fees, underwriting fees, and processing charges (often $300-800 total) are included in APR but don't affect your interest rate.
Note: Some lenders have higher fees but lower rates (or vice versa) — APR reveals the true cost
Bottom Line: APR shows lender costs only — not third-party or property-related expenses
When shopping lenders, always compare APR to APR. A lender advertising "6.25% rate!" might have 6.9% APR due to high fees, while another at 6.5% rate has 6.7% APR (lower total cost).
Golden Rule:
The loan with the lower APR costs less over time, even if the interest rate is higher
APR assumes you keep the loan for its full term (30 years). If you're selling or refinancing in 3-5 years, upfront costs matter less — focus more on monthly payment (interest rate).
Planning to stay <5 years?
Lower rate with higher fees might work. Staying 7+ years? Lower APR saves more long-term
By law, lenders must provide a Loan Estimate within 3 days of application. Page 3 shows both interest rate and APR side-by-side with all costs itemized.
Pro Tip:
Collect Loan Estimates from 3 lenders on the same day (rates change daily) and compare APRs directly
Some lenders advertise "no closing costs" but charge a higher interest rate to cover fees. The APR will reveal the true cost — it'll be significantly higher than the rate.
Example:
6.5% rate "no cost" = 7.1% APR vs. 6.75% rate with fees = 6.9% APR (second option cheaper long-term)
APR includes the interest rate PLUS all lender fees spread over the life of the loan. These fees include origination charges, discount points, upfront mortgage insurance (on FHA loans), processing fees, and underwriting costs. Because APR represents the total cost of borrowing — not just the interest — it's always higher than the interest rate. The bigger the gap between rate and APR, the more fees the lender is charging upfront.
It depends on how long you'll keep the loan. If you're staying in the home (and keeping the loan) for 7+ years, choose the lowest APR — it means lower total cost over time even if monthly payments are slightly higher. If you're planning to sell or refinance within 3-5 years, the lowest interest rate might be better since you won't hold the loan long enough for upfront fees to matter as much. Use APR for apples-to-apples comparison, but factor in your timeline when deciding.
Yes, absolutely. Two lenders might both offer 6.5% interest rates, but one charges $5,000 in fees (APR 6.75%) while the other charges $10,000 in fees (APR 6.95%). The second lender's higher APR reveals their loan is more expensive overall despite the same rate. This is why APR is crucial — it exposes hidden costs that the advertised rate doesn't show. Always request the Loan Estimate to see the APR and compare total costs, not just the rate.
No. Your monthly principal and interest payment is based solely on the interest rate, not APR. APR is just a comparison tool to show the true cost over the life of the loan. However, the upfront costs that make APR higher (like origination fees) must be paid at closing, so they affect your cash needed to close. The monthly payment calculation uses only: loan amount × interest rate ÷ term. APR includes those extra costs to give you a "what this really costs me annually" number for comparison shopping.
FHA loans require an upfront mortgage insurance premium (MIP) of 1.75% of the loan amount, which is rolled into the loan balance. This large upfront cost significantly increases the APR even though the interest rate might be competitive. For example, a $400,000 FHA loan has $7,000 upfront MIP, adding ~0.3-0.5% to the APR. Conventional loans don't have this upfront MIP (they have monthly PMI if down payment <20%, but that's not included in APR calculation the same way). That's why FHA APRs appear higher relative to their rates.
Paying discount points lowers your interest rate but increases your APR because the upfront cost of the points is factored in. For example: You pay $4,000 (1 point) to drop the rate from 6.5% to 6.25%. Your monthly payment is calculated at 6.25%, but your APR might be 6.55% because it includes the $4,000 you paid upfront amortized over 30 years. The APR shows whether buying points is worth it — if you're keeping the loan long-term and APR is still competitive, points can save money. If selling soon, high APR from points means you won't recoup the cost.
A "good" APR depends on current market rates and your credit profile. As of 2025, competitive Nevada mortgage APRs are roughly: Conventional (740+ credit): 6.5-7.0%, FHA (620-680 credit): 6.8-7.3%, VA (veterans): 6.3-6.8%. The gap between interest rate and APR should typically be 0.2-0.5% for conventional/VA, and 0.4-0.7% for FHA (due to upfront MIP). If the gap is over 1%, the lender is charging excessive fees — shop around. Always compare APRs from multiple lenders on the same day since rates change daily.
We'll show you both interest rate and APR with full cost transparency — no hidden fees or surprises.
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