How the APR gap becomes a dollar fee

The payment is built from the note rate. The APR then implies how much of the loan was not really financed.

The idea in one pass

First the calculator finds the level payment from the note rate, the principal, and the term. Then it asks what loan amount that same payment would support if the interest rate were the APR instead.

If the APR is higher, that supported amount is smaller than the principal. The difference is the prepaid finance charge. You are treated as having paid that difference at closing.

A larger gap, a larger fee

A note rate of 6% and an APR of 6.2% is a modest fee. A gap of a full percentage point is a large fee on a large loan, because the present-value difference scales with the payment and the term.

A longer term spreads the payment, so the same rate gap can imply a different dollar fee than a short term. Always read the dollar figure on the term you typed, not a rule of thumb from another quote.

Limits of the estimate

This is not a reproduction of the lender’s APR worksheet. Odd-day interest, mortgage insurance inside the APR, and buydown structures can make a disclosed APR mean something this one-gap formula does not capture.

Use it to see the size of the gap in dollars, then read the loan estimate for the named charges. The comparison is still useful when both offers are entered the same way.

This explains how WiseCalculator treats the numbers you type. It is not a lender’s offer and it is not advice for your loan.