Why APR exists
Two lenders can quote the same 6.25% and charge wildly different fees. APR was mandated so borrowers could compare the total cost of credit on a single number. It answers: what rate, with no fees at all, would produce this same payment on the money I actually received?
Reading the gap
The spread between the note rate and the APR is a direct measure of how fee-heavy an offer is. A gap of 0.05–0.15 points is normal on a low-fee mortgage. A gap above 0.3 points signals substantial points or origination charges — which may still be worth it if you are buying down the rate deliberately and will hold the loan long enough.
Where APR misleads
- Short holding periods. APR amortises fees over the full term. If you refinance in year four, you paid those fees over four years, not thirty, and the effective cost was far higher.
- Adjustable-rate loans. The APR assumes an index path that will not happen.
- Different terms. A 15-year and a 30-year APR are not directly comparable; the shorter loan costs far less in total regardless.
How to use it in practice
Compare APR across offers with the same term and structure, then sanity-check with a total-cost calculation over the period you realistically expect to hold the loan. If the two methods disagree, trust the holding-period calculation — APR is a standardised comparison tool, not a prediction about your life.