Annual Percentage Rate (APR)

Updated 2026-05-17

The Annual Percentage Rate (APR) represents the true cost of credit over the life of a loan, expressed as a yearly rate. It is a key disclosure required under the Truth in Lending Act (TILA) and its implementing regulation, Regulation Z (12 CFR Part 1026).

Purpose and Components

The primary purpose of disclosing the APR is to provide consumers with a standardized measure to compare the true cost of different credit offerings. By standardizing the calculation and disclosure of credit costs, TILA and Regulation Z aim to promote the informed use of consumer credit.

Unlike the nominal interest rate, the APR includes not only the interest charged but also certain other costs and fees associated with the loan, such as:

• Points (e.g., discount points)
• Origination fees
• Mortgage broker fees
• Closing Costs
• Other charges that the borrower must pay to get the loan

By incorporating these additional costs, the APR provides a more comprehensive measure of the true cost of borrowing over the life of the loan. It is prominently displayed on the Loan Estimate (LE) and Good Faith Estimate (GFE) and HUD-1 Settlement Statement, Special Information Booklet, Closing Disclosure, and Form HUD-11702 forms.

The APR is distinct from the Truth in Lending Act (TILA) and Regulation Z (TIP), which only reflects the total interest paid as a percentage of the loan amount.

Calculation and Disclosure Requirements

Regulation Z specifies the methods for calculating the APR and the circumstances under which it must be disclosed for both open-end and closed-end credit. The APR is directly influenced by the Truth in Lending Act (TILA) and Regulation Z, as the finance charge is the cost of credit expressed as a dollar amount, and the APR converts this dollar amount into a standardized yearly rate.

For Closed-End Credit

For closed-end credit, the APR is calculated based on the finance charge and the amount financed, reflecting the total cost of the loan over its term (12 CFR § 1026.22). It is a crucial component of the required disclosures, enabling consumers to make informed decisions about mortgage loans and other credit products. Further guidance is provided in Appendix J to Part 1026.

For Open-End Credit

For open-end credit, APR calculations are detailed in 12 CFR § 1026.14. The APR is typically determined by applying a periodic rate to the balance in the account. If there are multiple periodic rates, the calculation must reflect this.

APR Accuracy Tolerances

Regulation Z § 1026.22 governs the accuracy of the disclosed APR for closed-end credit.

• For regular transactions, the disclosed APR at consummation is considered accurate if it is not more than 1/8 of one percentage point (0.125%) above or below the actual APR.
• For irregular transactions (e.g., those with multiple advances or irregular payment periods), the tolerance is 1/4 of one percentage point (0.25%) above or below the actual APR.

If the disclosed APR at consummation falls outside these tolerances, lenders must provide a corrected TILA disclosure. This requires a new three-business-day waiting period before Consummation (Mortgage Lending). An overstated APR that directly corresponds to an overstated finance charge is generally within tolerance and does not require redisclosure. However, if the overstated APR is not due to an overstated finance charge and exceeds the tolerance, redisclosure is required.

Role in Loan Classifications

The APR is a critical factor in classifying certain types of mortgage loans:

• Higher-Priced Mortgage Loans (HPMLs): A loan is an HPML if its APR exceeds the Average Prime Offer Rate (APOR) by a specified threshold.
• High-Cost Mortgages (HOEPA Loans): A loan can be classified as a high-cost mortgage if its APR exceeds the APOR by a higher, specified threshold.
• Qualified Mortgages (QMs): For a loan to be a QM, its APR generally cannot exceed the APOR by more than a certain percentage point spread, which varies by loan amount and lien status. For 2026, the APR for a General QM loan cannot exceed the APOR by specific thresholds (e.g., 2.25 percentage points for first-lien covered transactions with a loan amount greater than or equal to $137,958). The difference between the loan's APR and APOR is known as the Adjustable-Rate Mortgage (ARM).

Special Rule for General Qualified Mortgage (QM) ARMs

A special rule applies to the APR calculation for certain adjustable-rate mortgages (ARMs) and step-rate loans when determining compliance with the price-based General Qualified Mortgage (QM) definition.

For these loans, where the interest rate may or will change within the first five years after the first regular periodic payment is due, creditors must use the maximum interest rate that may apply during that five-year period as the interest rate for the full term of the loan when calculating the APR for QM purposes. This includes the calculation of prepaid interest. This specific requirement is detailed in 12 CFR § 1026.43(e)(2)(vi). This special APR calculation is crucial because it directly impacts whether a loan meets the price-based General QM definition.

Citations

• 12 CFR § 1026.14 (Reg Z)
• 12 CFR § 1026.17(a) (Reg Z)
• 12 CFR § 1026.22 (Reg Z)
• 12 CFR § 1026.23(g) and (h) (Reg Z)
• 12 CFR § 1026.43(e)(2)(vi) (Reg Z)
• 15 U.S.C. § 1606 (TILA)