When comparing mortgage offers, you'll likely see two important numbers: the interest rate and the Annual Percentage Rate (APR). While they may look similar, they represent different costs associated with your loan.
Your interest rate is the cost of borrowing money and determines your monthly principal and interest payment. Your APR includes the interest rate plus certain lender fees and financing costs, providing a more complete picture of the loan's total cost.
Understanding APR vs. interest rate can help you compare mortgage options, evaluate loan offers and make a more informed borrowing decision. Whether you're buying your first home or refinancing your current mortgage, knowing how these two numbers work together can help you better understand the true cost of your loan.
Interest Rate vs. APR: Quick Comparison
What Is a Mortgage Interest Rate?
A mortgage interest rate is the percentage a lender charges to borrow money for a home loan. It directly affects how much interest you'll pay over the life of your mortgage and determines your monthly principal and interest payment.
While mortgage interest rates vary based on factors like your credit profile, loan type and market conditions, they don't include the additional costs associated with obtaining the loan.
What Is Mortgage APR?
APR stands for Annual Percentage Rate.
While the interest rate reflects only the cost of borrowing money, the APR provides a broader view of what you'll pay to finance your mortgage.
In addition to the interest rate, the APR may include certain costs such as:
- Loan origination fees
- Discount points
- Mortgage broker fees
- Certain closing costs
- Other lender-required financing charges
Because it includes these additional costs, the APR is typically higher than the interest rate.
Example:
Although both loans have the same interest rate, Loan B has a lower APR because it includes fewer upfront costs. This example shows why reviewing APR can help you better understand the total cost of a mortgage.
How to Compare Mortgage Offers: Interest Rate vs. APR
When comparing mortgage offers, it's important to look at more than just the advertised interest rate. While the interest rate helps determine your monthly principal and interest payment, the APR provides a broader view of the loan's overall cost by including the interest rate plus certain lender fees and financing costs.
The interest rate is especially useful when estimating your monthly payment and understanding how much interest you may pay over the life of the loan. However, a loan with the lowest interest rate isn't always the least expensive option if it comes with higher upfront costs or fees.
The APR can help you compare similar mortgage offers by accounting for many of these additional costs. For example, two lenders may offer the same interest rate, but the loan with the lower APR may have fewer fees and a lower overall cost. Comparing mortgage lenders can help you understand differences in interest rates, APRs, fees and loan terms before choosing the option that best fits your needs.
It's also important to look beyond rates advertised online or in marketing materials. Advertised mortgage rates are typically based on specific loan scenarios and borrower qualifications and may not reflect the exact terms available for your financial situation.
Before choosing a mortgage, review the full details of each loan offer, including the interest rate, APR, closing costs and other fees. You can find these details on your Loan Estimate, which lenders provide after you apply for a loan. Comparing the complete picture can help you better understand the true cost of borrowing and choose a mortgage that aligns with your financial goals.
Common Mistakes When Comparing Mortgage Loans
Shopping for a mortgage can feel overwhelming, especially if it's your first home purchase. Avoiding a few common mistakes can help you make a more informed decision.
- Choosing the Lowest Interest Rate Without Looking at Fees
A lower interest rate may seem like the best deal, but higher lender fees could make the loan more expensive overall. - Ignoring the APR
Looking only at the interest rate can make it difficult to compare the true cost of different loan offers. - Comparing Loans with Different terms or Costs
Mortgage offers should be compared carefully because differences in loan terms, fees and costs can affect the overall value of each option. - Not Considering How Long You'll Stay in the Home
The best mortgage for someone planning to stay in their home for 20 years may not be the best choice for someone expecting to move in five years. - Focusing Only on Monthly Payment
While affordability is important, also consider closing costs, loan fees and the total cost of borrowing over time.
The Bottom Line
Understanding the difference between APR and interest rate can help you make a more informed mortgage decision.
Your interest rate determines your monthly principal and interest payment, while your APR provides a broader view of the loan's total cost by including certain fees and financing charges.
When comparing mortgage offers, look beyond the advertised rate and consider the complete cost of each loan to choose the option that best fits your financial goals.
If you're ready to explore your financing options, an FNBO Mortgage Loan Officer can help.
About the Author
Kim is a mortgage loan officer with FNBO and is passionate about helping individuals and families achieve their homeownership goals. With years of experience in the mortgage industry, she is committed to providing personalized guidance, clear communication and exceptional service throughout the home financing process.
Frequently Asked Questions
Both are important, but they serve different purposes. The interest rate affects your monthly principal and interest payment, while the APR helps you compare the overall cost of different mortgage loans by including certain lender fees.
APR is typically higher because it includes the interest rate plus certain costs associated with obtaining the loan, such as loan origination fees, discount points and some closing costs.
Not directly. Your monthly principal and interest payment is generally based on your interest rate. The APR reflects the overall cost of financing the loan over time.
Not necessarily. A lower APR often indicates lower overall borrowing costs, but it's important to consider your financial goals, how long you plan to stay in the home and the type of mortgage you're choosing.
Yes. Two lenders may advertise the same interest rate while charging different fees, resulting in different APRs. That's why reviewing both the interest rate and APR is important when comparing mortgage offers.
No. APR (Annual Percentage Rate) measures the yearly cost of borrowing money, including certain fees. APY (Annual Percentage Yield) measures how much money you can earn on a savings or investment account after accounting for compound interest.
Not always. A loan with a slightly higher interest rate but lower lender fees may cost less overall than a loan with the lowest advertised rate. Compare both the interest rate and APR to better understand the total cost.
The interest rate is the cost of borrowing money and determines your monthly principal and interest payment. APR includes the interest rate plus certain lender fees and financing costs, providing a broader view of the loan's total cost.
