Nominal rate vs APR
The nominal rate is the interest rate advertised by the lender. The APR includes fees and points, spread over the loan's life — giving you the true cost of borrowing.
A loan with a lower nominal rate but high fees can end up with a higher APR than a loan with a higher nominal rate but no fees. Always compare APRs, not nominal rates, when shopping loans.
What counts as a fee?
- Origination fee — processing, documentation, underwriting charges.
- Discount points — upfront % of loan paid to reduce the nominal rate.
- Broker fees — if going through a mortgage broker.
- Private mortgage insurance (PMI) — sometimes included in APR.
Not usually included in APR: property taxes, homeowner's insurance, HOA fees, or title insurance.
FAQ
Why is APR higher than the nominal rate?
Because APR bakes in upfront fees by treating the “real” loan amount as (loan − fees). Same EMI on a smaller effective principal means a higher effective rate.
Should I pay points?
Only if you plan to hold the loan long enough to recover the cost. Divide the points cost by monthly savings to get the break-even in months. If you'll keep the loan past that, points are worth it.
Does APR apply to credit cards?
Yes — credit card APR is the annualized cost of carrying a balance. Unlike loan APR, credit card APR is usually quoted directly as the effective rate, without fees.