Two offers with the same rate can cost very different amounts. The fees, and how they’re folded into the APR, make the difference.
The interest rate grabs the headlines, but it’s not the whole price of a mortgage. Fees, points and closing costs can easily add several thousand dollars.
Rate versus APR
The interest rate sets your monthly principal-and-interest payment. The annual percentage rate (APR) spreads certain loan costs, such as points and some lender fees, over the life of the loan and expresses them as a yearly rate.
If two offers have the same rate but different APRs, the higher APR usually has higher fees. APR is most useful when you compare loans of the same type and term, so compare like with like across loan programs.
How points work
A discount point is a fee paid at closing to lower your rate. One point costs 1% of the loan amount.
Example: on a $300,000 loan, one point costs $3,000. Suppose it lowers the monthly payment by $55. The break-even point is $3,000 ÷ $55 ≈ 55 months, a little over four and a half years. If you expect to keep the loan longer than that, the point may pay off; if you might sell or refinance sooner, it probably won’t.
The main closing costs
| Cost | What it covers | Can you shop for it? |
|---|---|---|
| Origination or lender fees | Processing and underwriting the loan | Compare between lenders |
| Appraisal | Valuing the home | Usually arranged by the lender |
| Title insurance and settlement | Checking ownership and handling closing | Often, yes |
| Prepaid items | First months of taxes, insurance and interest | No, but amounts vary by date |
Shop with the right document. Every lender must give you a standard Loan Estimate within three business days of your application, which makes these costs comparable line by line.
Lowering the total
- Compare at least three Loan Estimates on the same day.
- Ask whether a lender credit or fewer points suits your timeline better.
- Shop for the services the Loan Estimate says you can shop for.
The Loan Estimate and Closing Disclosure walk-through shows where each of these costs appears.
The short version
- The APR adds certain fees to the interest rate, so it’s a better guide to cost than the rate alone.
- One discount point costs 1% of the loan amount and lowers the rate by an amount the lender sets.
- Divide the cost of points by the monthly saving to find your break-even point.
Readers also ask
Are closing costs negotiable?
Some are. Lender fees and points vary between lenders, and you can often shop for title insurance and settlement services.
What is a lender credit?
The opposite of points: you accept a slightly higher rate and the lender pays some of your closing costs.
Can I roll closing costs into the loan?
Sometimes, especially with refinancing. It lowers the cash you need now but increases what you borrow and repay.
This guide is general information about U.S. mortgages, not financial, tax or legal advice. Loan terms depend on the lender and on your credit, income and property, so confirm the details with your lender, and see consumerfinance.gov for official guidance.
