Why the Lowest APR Isn't Necessarily the Best Loan

A hasty choice could lead you to the wrong mortgage

When getting a mortgage, it's wise to shop around for the best deal. But how exactly do you compare lenders? Most borrowers compare the Annual Percentage Rate (APR) from several lenders and choose the lowest one. That strategy makes sense in theory, but it can lead you down the wrong path.

APR is only a valid comparison tool when comparing apples to apples, but that’s easier said than done.

Are Fees Included?

Lenders have some wiggle room when they calculate APR for you. They may or may not include selected costs, but you still need to pay those costs. For example, credit report fees, appraisal fees, and inspection fees may not be part of a given APR quote. Since different providers can charge different fees, comparing APR becomes difficult.

Honest lenders include more fees that they really expect you to pay, but that makes their APR appear higher. Make sure you understand all the fees involved in closing costs and how they relate to the APR.


Bait and Switch With APR

APR can also be deceiving as you review advertisements. Websites might show attractive APRs much lower than any you’ve come across, but you might not qualify for those rates.

For example, an advertised APR might not include mortgage insurance costs. If you need private mortgage insurance (PMI), your APR will be higher.

In addition, those attractive APR quotes are for the best borrowers out there. If you have less-than-perfect credit, a small down payment, or you need a low documentation loan, you’ll have a higher APR.

Does APR Assume a Long-Term Relationship?

APR calculations assume that a loan will be paid off over its entire lifetime. For example, the APR on a 30-year loan assumes that you’ll keep the loan for the full 30 years. In reality, most people do not keep their loans for the entire term. Seven years or so is more likely.

If you pay off a 30-year loan after seven years, APR may not be as helpful as you’d like. Loans with high up-front fees and lower interest rates show lower APRs. But you won’t be able to spread the up-front costs if you pay off the loan after just a few years.

If you pay your loan off early, the actual APR you’ll pay is higher than what you see quoted. APR is most accurate if you plan to keep a loan for its entire term.

How to Use APR

To choose the best loan, look closely at each lender’s quote. Examine the interest rate and closing costs (not just the APR) and compare to see which costs are included. There are several ways to get an apples-to-apples comparison:

  1. Build a spreadsheet that models every aspect of your loan, including interest costs and monthly payments. 
  2. Use a custom APR Calculator to understand your loan.

You can also lean on your lender to help you wade through APR comparisons. Ask each of them, “How is your loan better than this other loan?” Show them the loan estimate or good faith estimate (GFE) and ask them to walk you through the details.


Getting the lowest APR doesn’t mean you’re doing the best thing for your overall financial position. Look at the big picture as well. For most borrowers, APR makes the loan with a lower rate and higher up-front fees look best. However, that means you’ll have to come up with thousands of dollars today. You might benefit from lower monthly payments over time, but is it worth it?

Looking at the breakeven point can help, and other factors as well. Could you put the few thousand dollars of up-front costs into an IRA or retirement plan instead and come out ahead? Is an extra $100 per month on your payment going to matter that much in five or 10 years? Again, are you going to keep the loan long enough to recoup those costs? 

By looking at the big picture and running some numbers you have a better chance of doing the right thing.