There’s more to getting a great mortgage deal than comparing interest rates. While your interest rate plays the largest role in the total cost of your loan, it doesn’t paint the whole picture.

In this post, we’ll explain what APR is and how it’s usually a better metric for comparing mortgage offers.

What is APR?

APR stands for annual percentage rate. It factors in your interest rate, closing costs and all other fees, to calculate the total cost of your mortgage if you take it to term. When comparing two loans side by side, the loan with the lowest APR will be the cheapest over time. This is because the loan’s interest rate tells you how much interest you will pay on your loan, while the APR calculates the loan’s total cost, including interest and all other expenses.

A simple example

Let’s say you are looking at two different options for a $250,000 mortgage. Lender A offers 5% with $4,000 in closing costs and Lender B offers 4.75% with $18,000 in closing costs.

How can you know which loan is the better deal? Will a 0.25% lower rate be sufficient to make up for $14,000 in closing costs?

One way to determine the answer is by looking at the APR. The APR on Lender A’s loan works out to 5.14%. For Lender B’s loan, it’s 5.36%. Even though Lender B offers a lower rate, the extra closing costs make the total package more expensive over time.

Should I always choose the lower APR?

Not necessarily.

While comparing APR does show you which loan costs the least over time, there are other factors that can affect which mortgage is best for you. Here are just a few examples:

• If you plan to sell your home long before your loan is paid off, you may not get through enough payments to make up the savings compared to a different option.
• The loan with the best APR often comes with the highest closing costs, typically because the lender requires that you purchase points to buy down the rate–if you can’t afford to pay for points, then the cheaper loan might not be right for your personal circumstances.
• The loan with the lowest mortgage payment doesn’t necessarily always offer the lowest APR, depending on the structure of the loan. If a low mortgage payment is your number one priority, you may still choose the more expensive loan to keep your monthly payment down.

How to get help when comparing loans

If you’re new to shopping for mortgages, the difference between APR and interest rate can be confusing. Working with a mortgage broker makes it easy. Your broker will eliminate the guesswork and explain which loan option works best for your unique situation.

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