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Why does my APR look worse when I'm paying points?
Key Takeaways
- APR includes points and fees spread over the loan term, not just your monthly rate.
- Points lower your interest rate but increase your APR calculation.
- Your Loan Estimate shows both numbers so you can compare the trade-off.
Why does my APR look higher when I pay points?
You're paying points to lower your interest rate but your APR looks higher than expected. The APR calculation includes both your interest rate and the upfront cost of those points spread over the loan term, which can make it appear worse than just looking at the rate alone.
APR works differently than your interest rate. Your interest rate is what you pay monthly, while APR includes your rate plus upfront costs like points, origination fees, and other lender charges divided over the loan's life. When you pay points, those upfront dollars get factored into the APR calculation even though you're lowering your monthly rate.
Check your Loan Estimate to see how the numbers break down. Look at Section A for your interest rate and Section B for your APR. The difference shows how much those upfront costs add to your effective borrowing cost. Compare the monthly payment savings from your lower rate against what you're paying upfront in points.
Share your Loan Estimate with your lender and they can walk you through exactly how your points affect both the interest rate and APR calculation.
About the Author
Dan Green
20-year Mortgage Expert
Dan Green is a mortgage expert with over 20 years of direct mortgage experience. He has helped millions of homebuyers navigate their mortgages and is regularly cited by the press for his mortgage insights. Dan combines deep industry knowledge with clear, practical guidance to help buyers make informed decisions about their home financing.
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