Why a mortgage APR is usually higher than its note rate

A mortgage quote may show a 6.50% interest rate and a 6.80% APR. Those figures measure different things. The note rate determines contractual interest under the loan terms. APR is a standardized way to express the rate plus certain costs of obtaining the credit over the assumed loan life.

What the note rate tells you

The note rate is the interest rate stated in the promissory note. It is used to calculate interest due on the outstanding principal under the payment schedule. It does not include all charges a borrower pays to obtain the mortgage, such as certain points or lender and broker fees.

What APR adds

APR reflects the note rate plus applicable finance charges under Truth in Lending rules. CFPB consumer guidance identifies points, mortgage broker fees and other charges paid to obtain the loan as costs that can be included. Those charges are annualized across the assumed term and payment stream, which is why APR is usually higher than the interest rate when such costs apply.

A simplified comparison

Imagine two fixed-rate offers with the same principal, term and note rate. If one has more upfront charges included in the finance charge, its APR will generally be higher. If a borrower pays points to reduce the note rate, the APR incorporates both the lower rate and the upfront cost. The APR helps compare total borrowing cost under stated assumptions; it does not reveal every feature of a loan by itself.

Why APR comparisons can mislead

An adjustable-rate mortgage's disclosed APR depends on assumptions about future rates and payments; it does not show the maximum future interest rate. Comparing a fixed-rate APR with an adjustable-rate APR can therefore obscure reset risk. APRs for closed-end loans and home equity lines may also include different charge categories. Compare similar products and inspect rate, fees, payment changes, term, prepayment provisions and total cash due.

Where the Loan Estimate shows each figure

On the CFPB Loan Estimate, the interest rate appears in the Loan Terms section on page 1, while APR appears in the Comparisons section on page 3. An MLO should describe what each number represents accurately and avoid promising that the APR is a forecast of the exact cost if the loan is paid off early or its terms change.

Exam distinction

• The note rate prices interest on principal under the note.
• APR is broader because it incorporates certain finance charges as well as interest.
• APR is usually, but not invariably, above the note rate; rate credits and loan details affect the comparison.
• APR is not the same as the periodic interest rate used to compute scheduled principal-and-interest payments.
• For adjustable-rate products, APR does not state the maximum future rate.

Key takeaway

Use the note rate to understand contractual interest and APR to compare a broader annualized cost under disclosure assumptions. Read both with the loan's fees, payment terms and rate structure.