You are looking at a Loan Estimate with a 6.5% interest rate on page 1 and a 6.812% APR on page 3, and nobody explained why there are two numbers. Both are correct. They measure different things, and the gap between them tells you something useful about what this loan actually costs.
Your interest rate is the cost of borrowing the principal, and nothing else. It is the number that determines your principal-and-interest payment. If you borrow $400,000 at 6.5% on a 30-year fixed, your P&I payment is $2,528 a month, and the 6.5% is the only input that matters for that calculation.
That is the number lenders advertise, because it is the smaller one.
APR stands for Annual Percentage Rate. It takes your interest rate and folds in the finance charges you pay to get the loan, then expresses the whole thing as a single annual percentage. It exists because of the Truth in Lending Act, and its entire purpose is to let you compare two offers that hide their costs in different places.
Roughly speaking, the APR includes:
It generally does not include your homeowners insurance premium, your escrow deposits, or title and settlement fees you shopped for yourself. So the APR is not the total cost of closing. It is specifically the cost of financing, spread across the life of the loan.
Your interest rate is on page 1, top left, in the Loan Terms box.
Your APR is on page 3, under the heading Comparisons. It sits next to two other numbers worth knowing: the amount you will have paid in five years, and the Total Interest Percentage, which is the total interest you pay over the full term as a percentage of the loan amount.
Those three numbers on page 3 exist entirely so you can compare lenders. They are the most useful part of the document and the part almost nobody reads.
The gap between your rate and your APR is a rough measure of how much you are paying upfront to get that rate.
A small gap — say 6.5% and 6.58% — means low upfront finance charges. A wide gap — 6.5% and 6.95% — means you are paying real money in points and lender fees, and the advertised rate is being subsidized by cash you bring to closing.
This is what makes APR useful when you are comparing two Loan Estimates. A lender quoting 6.375% with two points may well cost you more than a lender quoting 6.625% with none. The rate alone cannot show you that. The APR is designed to.
APR assumes you keep the loan for its entire term. That single assumption is what breaks it in practice.
It spreads your upfront costs across all 360 payments. If you sell or refinance in year six, you paid those costs in full and only got six years of the lower rate. Your real cost was much higher than the APR suggested. The median American homeowner does not keep a mortgage for thirty years, which means APR is systematically optimistic about loans with heavy upfront costs.
It is also close to meaningless on an adjustable-rate mortgage. The APR calculation has to assume something about future rates, and what it assumes is that the index stays exactly where it is today for the next three decades. It will not.
And one clarification that trips people up: APR is not always higher than the rate. If a lender is giving you credits that exceed the finance charges — a lender-credit structure where you take a higher rate in exchange for cash toward closing — the APR can come in below the note rate. It is unusual, but it is not an error.
Use the APR to compare loans of the same type and same term against each other. That is the job it does well.
Then ask the question APR cannot answer: how long do you realistically expect to be in this house? If the answer is under ten years, the number that matters more than APR is what you are paying in points and lender fees right now, and whether the lower rate you are buying will have time to earn that money back.
This is general educational information, not financial, legal, or tax advice. Rules and figures change, and specifics vary by lender, loan type, credit profile, and location. Verify anything that affects a decision with your servicer, lender, or a licensed professional.