Convert a quoted rate plus fees into the true annual percentage rate you actually pay.
APR (Annual Percentage Rate) is a federal disclosure requirement under the Truth in Lending Act (TILA). It's the interest rate that, when applied to the amount financed (the loan less all prepaid finance charges), produces the same monthly payment as the quoted rate applied to the full loan. Because prepaid charges reduce the money you actually receive while the payment stays the same, the APR is always higher than the nominal rate whenever any finance charges exist.
Scheduled payment
Monthly payment = Loan × monthly_rate / (1 − (1+r)^−n)
APR (TILA definition)
APR = 12 × rate where PMT(loan − finance charges, r, n) = monthly payment
The interest rate determines your monthly payment; APR measures the true annual cost including fees. Two lenders offering the same rate but different fees will have different APRs. Federal law requires APR disclosure precisely so borrowers can compare loans on an equal basis.
Under TILA, APR must include: origination fees, discount points, broker fees, and most underwriting/processing fees. It excludes: appraisal fees, title insurance, survey costs, and government recording fees. The APR quoted on a Loan Estimate uses this precise TILA definition.
Points reduce your rate but cost money upfront. The break-even point is how many months of lower payments it takes to recover that upfront cost. If you sell or refinance before break-even, points were not worth it. This calculator shows the break-even assuming each point buys a 0.25% rate reduction (a common rule of thumb).
Fees are a fixed dollar amount spread over the life of the loan. On a 30-year mortgage, that cost is amortised over 360 payments; on a 5-year loan, the same fee is spread over 60 payments, making the per-period impact — and therefore the APR inflation — larger.