- Your mortgage annual percentage rate (APR) is different from your mortgage interest rate.
- The APR gives you a more accurate sense of what you'll pay because it includes fees and other charges.
- A mortgage lender may charge a higher interest rate than another lender and yet offer a better APR.
Mortgage borrowers pay a lot of attention to what mortgage rates they're offered, and for good reason — the better your rate, the less you'll pay each month and over the life of your loan. But as you shop around, you'll notice that mortgage lenders advertise two different rates: an interest rate, and an APR. What does this additional rate mean for your mortgage?
A mortgage APR gives you a holistic view of how much the mortgage will cost overall, over the entire loan term. Let's take a closer look at the difference between mortgage APR vs. interest rate.
What is APR?
When looking at your mortgage documents, you'll see two percentages pop up: the interest rate and annual percentage rate (APR). These are two distinct percentages, and it's important to know the difference.
Definition of APR
The APR is the interest rate plus the costs of things like discount points and fees, including those that make up your closing costs. This number is higher than the interest rate and is a more accurate representation of what you'll actually pay on your mortgage annually.
How APR is calculated
Here are the costs you can expect to be represented in your APR:
- Interest rate
- Discount points: You can pay a fee at closing for a lower interest rate on your mortgage. One discount point usually costs 1% of your mortgage, and it reduces your rate by 0.25%. So if your rate on a $200,000 mortgage is 6.5% and you pay $4,000 for two discount points, your new interest rate is 6%.
- Mortgage insurance
- Origination fee
- Mortgage fee
- Underwriting fee
- Loan processing fee
- Escrow fee
- Legal fees
Although the APR gives you a better idea of what you'll pay on your mortgage than the interest rate, a lender doesn't include all fees in your APR. Here are some fees that usually aren't reflected in the APR:
- Title examination and insurance fees
- Notary fees
- Attorney fees
- Credit report fees
- Home inspection fees
- Appraisal fees
- Recording fee
- Property survey fees
Ask your lender for an itemized list of fees so you can know what you're paying, both toward the APR and toward other fees.
Importance of APR in loans
Why is it important to understand the difference between the interest rate and APR? When you're shopping around for mortgage lenders, you may find that one charges a lower interest rate, so you think that company is the obvious choice. But you might actually find out the APR is higher than what you can get with another lender because it charges hefty fees. In reality, it might not be the best deal.
What is the interest rate?
Interest rate and APR are closely tied. Here's what your interest rate means for your loan.
Definition of interest rate
Your interest rate is the fee the lender charges you for borrowing money, expressed as a percentage such as 5.75%. Along with your mortgage principal, you'll pay interest each month.
How interest rate is calculated
Your lender sets your interest rate based on your credit score, loan amount, loan program, your debt-to-income ratio, and other factors. Generally speaking, the better your credit score, the lower the interest rate you'll get.
Importance of interest rate in loans
The interest rate you get is a huge part of your mortgage loan. It determines your monthly payment, as well as your long-term costs of borrowing the funds. It's also a key number you'll want to know when comparing mortgage options.
Key differences between APR and interest rate
APR and interest rate are related, but they aren't one and the same. Here are the differences to be aware of:
Components included in APR
APR is an all-inclusive number. It includes your interest, fees, mortgage insurance, closing costs, discount points, and other expenses and expresses it as a percentage. This is what you can expect to pay total for the loan across each year.
Components included in interest rate
The interest rate is just that — the rate of interest you'll pay on the loan you borrow. You'll typically get a lower rate if you bring a big down payment or have a good credit score, and a higher rate if you do the opposite.
Impact on monthly payments
Your APR doesn't directly impact your monthly payments. Your interest rate does, however. Your interest rate will determine the portion of your payment that goes toward principal and interest each month, and the lower your rate, the lower your payment will be.
How to use APR and interest rate when comparing loans
You should always shop around for your mortgage loan, and comparing APRs and interest rates among loan offers is one way to do it.
Comparing loan officers
The APR and interest rate can help you understand how two loans compare to each other.
Let's look at two hypothetical 30-year fixed-rate mortgages for $200,000 that charge different interest rates and fees.
Mortgage A charges a 6.5% rate. Mortgage B charges a 6.25% rate, but you pay for a discount point, lowering the rate to 6%.
Mortgage A comes with a higher rate but lower fees. Mortgage B comes with a lower rate but higher fees. Which one has the better APR?
| Mortgage A | Mortgage B | |
| Interest rate | 6.5% | 6.25% |
| Origination fee | $1,000 | None |
| Other closing costs | $4,000 | $10,000 |
| Discount points | None | 1 discount point |
| APR | 6.745% | 6.952% |
Even though Mortgage B has a lower rate, its hefty fees give it a higher APR, meaning it will cost you more annually to borrow.
A lender is legally required to tell you the APR of your mortgage, not just the interest rate. If you're still searching for the right lender, request a list of fees from each one to get a good idea of which one will offer the best APR.
Understanding total loan costs
Your interest rate and APR will also impact the total costs of any mortgage loan. To get an idea of how two loans compare on this front, go to the last page of your Loan Estimate from each lender. There will be a Total Interest Percentage, which reflects the total interest you'll pay over the entire loan term, and your total costs after five years into the loan. Both can help you choose the best loan option.
Common misconceptions about APR and interest rate
It's easy to get APR and interest rate confused, and there are some misconceptions that muddy the water, too. See below to clear these up:
APR is always higher than interest rate
While it's true that APR is usually higher than the interest rate, that's not always the case. If a loan has no added fees or charges, for instance, the APR and interest rate would actually be the same.
APR vs. interest rate in fixed- and variable-rate loans
When you get a mortgage, you can choose between fixed and variable interest rates. Because a variable rate loan has an interest rate that can change, that means the initial APR you're quoted likely won't be the same one you experience once your rate starts to adjust. It's important to keep this in mind before you take out one of these loans.
Impact of fees on APR
Fees are a big component of APR, so if you use a lender that charges a lot of them, you'll have a higher APR than one with little to no fees. You can check your Loan Estimates to compare lenders on fees and APR. (Fees do not affect your interest rate.)
FAQs on APR vs. interest rate
The APR includes fees, interest, and other annual costs, while the interest rate is purely the cost of borrowing the money.
APR includes additional fees and costs, making it a more comprehensive measure of a loan's total cost each year.
APR does not directly affect monthly payments but indicates the overall cost of the loan. Your interest rate and loan amount are what will determine your monthly payments.
Consider both; APR gives a fuller picture of total costs, while interest rate shows monthly payment cost.
