# Mortgage rate question - Flat vs APR **URL:** \ **Category:** Factual Questions\ **Created:** [April 1, 2009, 1:12am UTC](https://boards.straightdope.com/t/mortgage-rate-question-flat-vs-apr/491523 "2009-04-01T01:12:10Z")\ **Posts on this page:** 11\ **Page:** 1
**Author:** ![FilmGeek](https://avatars.discourse-cdn.com/v4/letter/f/b19c9b/32.png) [@FilmGeek](https://boards.straightdope.com/u/FilmGeek)\ **Post date:** [April 1, 2009, 1:12am UTC](https://boards.straightdope.com/t/mortgage-rate-question-flat-vs-apr/491523/1 "2009-04-01T01:12:10Z")
There is a radio commercial playing around here and it says great time to refinance … blah blah blah … **5% mortgage with a 5.25% APR.** What does this mean? ---
**Author:** ![friedo](https://avatars.discourse-cdn.com/v4/letter/f/8edcca/32.png) [@friedo](https://boards.straightdope.com/u/friedo)\ **Post date:** [April 1, 2009, 1:24am UTC](https://boards.straightdope.com/t/mortgage-rate-question-flat-vs-apr/491523/2 "2009-04-01T01:24:52Z")
APR has a specific definition which accounts for the interest, plus additional expenses like origination fees, PMI, closing costs, etc. Federal law requires lenders to disclose the APR to prevent them from advertising very low interest rates and then including all sorts of hidden fees to make up for the low interest. ---
**Author:** ![IAmNotSpartacus](https://avatars.discourse-cdn.com/v4/letter/i/cc9497/32.png) [@IAmNotSpartacus](https://boards.straightdope.com/u/IAmNotSpartacus)\ **Post date:** [April 1, 2009, 3:04am UTC](https://boards.straightdope.com/t/mortgage-rate-question-flat-vs-apr/491523/3 "2009-04-01T03:04:44Z")
Also, APR (annual percentage rate) is used to refer to the effective interest rate once compounding is taken into effect. 5% annual interest turns out to be a bit more when interest is accrued every 30 days. ---
**Author:** ![Tom\_Tildrum](https://avatars.discourse-cdn.com/v4/letter/t/e95f7d/32.png) [@Tom\_Tildrum](https://boards.straightdope.com/u/Tom_Tildrum)\ **Post date:** [April 1, 2009, 10:14am UTC](https://boards.straightdope.com/t/mortgage-rate-question-flat-vs-apr/491523/4 "2009-04-01T10:14:54Z")
> [@IAmNotSpartacus](#): > > Also, APR (annual percentage rate) is used to refer to the effective interest rate once compounding is taken into effect. 5% annual interest turns out to be a bit more when interest is accrued every 30 days. CD rates are typically quoted in the same way, for this reason. ---
**Author:** ![hobscrk777](https://avatars.discourse-cdn.com/v4/letter/h/a6a055/32.png) [@hobscrk777](https://boards.straightdope.com/u/hobscrk777)\ **Post date:** [April 1, 2009, 1:13pm UTC](https://boards.straightdope.com/t/mortgage-rate-question-flat-vs-apr/491523/5 "2009-04-01T13:13:58Z")
I think ultimately it’s a market gimmick. A 5% loan sounds more attractive than a 5.25% loan, but the 5.25% is what you will actually end up paying due to the compounding of interest. ---
**Author:** ![Tastes\_of\_Chocolate](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tastes_of_chocolate/32/3232_2.png) [@Tastes\_of\_Chocolate](https://boards.straightdope.com/u/Tastes_of_Chocolate)\ **Post date:** [April 1, 2009, 8:49pm UTC](https://boards.straightdope.com/t/mortgage-rate-question-flat-vs-apr/491523/6 "2009-04-01T20:49:59Z")
> [@hobscrk777](#): > > I think ultimately it’s a market gimmick. A 5% loan sounds more attractive than a 5.25% loan, but the 5.25% is what you will actually end up paying due to the compounding of interest. It’s no gimmick. The interest rate IS 5%, but it’s compounded, usually monthly. It’s similar to pricing stuff in the store. Just because the TV says it costs $1000, doesn’t mean I can lay 10 $1000 bills on the counter and walk away. There is going to be sales tax on it. ---
**Author:** ![nivlac](https://avatars.discourse-cdn.com/v4/letter/n/3bc359/32.png) [@nivlac](https://boards.straightdope.com/u/nivlac)\ **Post date:** [April 1, 2009, 10:43pm UTC](https://boards.straightdope.com/t/mortgage-rate-question-flat-vs-apr/491523/7 "2009-04-01T22:43:52Z")
> [@FilmGeek](#): > > … **5% mortgage with a 5.25% APR.** > What does this mean? In this case, it means that there must be a lot of extra fees involved in getting the loan! It’s not possible to have an APR of 5.25% when the nominal rate is 5% unless the 5.25% includes other fees like loan origination fees, administrative fees, etc. No amount of compounding will lead you to 5.25% from a nominal rate of 5%. So in this case, I would ask to see a breakdown of all of those fees. ---
**Author:** ![teela\_brown](https://avatars.discourse-cdn.com/v4/letter/t/d9b06d/32.png) [@teela\_brown](https://boards.straightdope.com/u/teela_brown)\ **Post date:** [April 1, 2009, 10:52pm UTC](https://boards.straightdope.com/t/mortgage-rate-question-flat-vs-apr/491523/8 "2009-04-01T22:52:12Z")
> [@Tastes\_of\_Chocolate](#): > > Just because the TV says it costs $1000, doesn’t mean I can lay 10 $1000 bills on the counter and walk away. Bet you could. ---
**Author:** ![Cillasi](https://avatars.discourse-cdn.com/v4/letter/c/71e660/32.png) [@Cillasi](https://boards.straightdope.com/u/Cillasi)\ **Post date:** [April 2, 2009, 3:26am UTC](https://boards.straightdope.com/t/mortgage-rate-question-flat-vs-apr/491523/9 "2009-04-02T03:26:26Z")
Please come shop at my store! > [@Tastes\_of\_Chocolate](#): > > It’s no gimmick. The interest rate IS 5%, but it’s compounded, usually monthly. It’s similar to pricing stuff in the store. Just because the TV says it costs $1000, doesn’t mean I can lay 10 $1000 bills on the counter and walk away. There is going to be sales tax on it. ---
**Author:** ![Tim\_T-Bonham.net](https://avatars.discourse-cdn.com/v4/letter/t/46a35a/32.png) [@Tim\_T-Bonham.net](https://boards.straightdope.com/u/Tim_T-Bonham.net)\ **Post date:** [April 2, 2009, 7:14am UTC](https://boards.straightdope.com/t/mortgage-rate-question-flat-vs-apr/491523/10 "2009-04-02T07:14:04Z")
> [@Tastes\_of\_Chocolate](#): > > It’s no gimmick. The interest rate IS 5%, but it’s compounded, usually monthly. It’s similar to pricing stuff in the store. Just because the TV says it costs $1000, doesn’t mean I can lay 10 $1000 bills on the counter and walk away. There is going to be sales tax on it. But the sales tax goes to the government, and is the same amount at any TV store in the state. The extra .25% on the loan goes to the lender, via various so-called fees. And those ‘fees’ will vary from different lenders, so including them in the APR forces all the lenders to disclose them equally. ---
**Author:** ![Tastes\_of\_Chocolate](https://sea3.discourse-cdn.com/straightdope/user_avatar/boards.straightdope.com/tastes_of_chocolate/32/3232_2.png) [@Tastes\_of\_Chocolate](https://boards.straightdope.com/u/Tastes_of_Chocolate)\ **Post date:** [April 2, 2009, 10:38pm UTC](https://boards.straightdope.com/t/mortgage-rate-question-flat-vs-apr/491523/11 "2009-04-02T22:38:09Z")
Ok, ok. Bunch of smartasses, the lot of you. So you can’t lay down 10 $100 bills, and walk away. Happy?