If you want to save on your mortgage, worry less about the APR and more about the fees

The best way to get a good deal on a mortgage is by comparing different quotes, but you have to know what you’re looking for when weighing the different offers.

The loan’s annual percentage rate (APR) can give you a good idea of the overall cost of a mortgage because it factors in loan fees and the interest rate. However, you don’t just want to chase the lowest rate — APRs are based on the full life of the loan (usually 30 years), and most borrowers won’t keep their mortgage for that long. “As soon as you refinance … your APR is different,” says Gordon Miller, president of North Carolina-based Miller Lending Group. “It starts climbing.”

CNBC Select explains what numbers you should focus on in your mortgage offer when the advertised APR doesn’t reflect how long you’re likely to stay in the home.

A mortgage APR is based on the interest rate and lender fees. It’s almost always higher than the interest rate because it’s meant to show the total borrowing cost. If you keep your mortgage for its full term, which is typically 30 years, then the APR listed on your Closing Disclosure is what you end up paying.

However, if you refinance your mortgage or sell your home before 30 years, “the actual APR would be different … since any fees you paid would effectively be broken down over a shorter period of time,” says Keith Gumbinger, vice president at HSH, a mortgage industry publication.

Very few, if any homeowners will keep a mortgage for the full 30 years. Last year, the average home seller lived in their home for six years, according to the ATTOM Year-End 2022 U.S. Home Sales Report. And homeowners that find their “forever home” are still likely to refinance (i.e. get a new mortgage) at some point. According to the most recent data provided by Black Knight, the average mortgage was held for just over 3.5 years before a rate and term refinance and just over five years before a cash-out refinance.

One way to minimize the headache of paying lender fees on a shortened schedule is by avoiding them in the first place. Ally Bank, for example, doesn’t charge any lender fees at all and was ranked by CNBC Select as one of the best mortgage lenders on the market. And Chase Bank provides borrowers with a suite of calculators, educational courses and other tools to help them better understand the terms (and expenses) of any mortgage they take on.

Having a rough estimate of how long you plan on keeping your home loan is important. If you know you’ll move out in a few years, focus on keeping your upfront fees lower.

And even if you don’t plan on refinancing or selling the home, it could still be prudent to minimize your closing costs for the following reasons:

• You never know when a job change or a change in life priorities may necessitate a move.
• Rates constantly fluctuate and at some point, they may be lower than they are today, which means you could save money by refinancing to a lower rate.
• Even if rates don’t bottom out, you may want to do a cash-out refinance to pay for a remodeling project or to get cash for a down payment on a rental property.

Minimizing or eliminating the lender fees has another benefit — it makes shopping for a mortgage easier because if there aren’t lender fees, then comparing interest rates becomes far more useful. A 2008 study by the Urban Institute showed that borrowers with “no-cost” FHA loans paid $1,200 less (a 35% reduction in fees) than those who paid upfront lender fees. According to the study, “loans with simpler terms are less expensive,” in part because “consumers have a tougher time comparing alternatives when trade-offs are involved.”

When you’re looking at mortgage quotes be sure you’re comparing apples to apples. When offering mortgages without any upfront fees, lenders typically either roll that cost into the mortgage balance or charge you a higher interest rate. Ask lenders what types of loans and fee structures they offer and then you can weigh the trade-offs between a higher loan balance, higher interest rate or paying fees.

A mortgage’s APR is meant to show the borrower the actual cost of the loan because it includes interest and certain fees. However, mortgage APRs are calculated over the life of the loan (usually 30 years) and borrowers rarely hold onto a mortgage that long.

So an APR fails to show the effect upfront fees have, especially in the short term.

When you’re comparing mortgage quotes, pay attention to both the interest rate and the fees. One way to simplify the comparison is to ask your lender about “no-cost” loans where you have no out-of-pocket lender fees. With a “no-cost” loan, you can shop around based solely on the interest rate instead of needing to analyze the tradeoff between rates and fees.