Interest Rate vs. APR: What’s the Difference?

3 Min Read
Published Dec. 6, 2022
Woman and man review mortgages together.
Written By
Reviewed By

The interest rate and APR on a mortgage both refer to the costs associated with borrowing money, but these terms aren’t interchangeable.

Here’s the difference between interest rate and APR, and how these figures affect the cost of your mortgage.

What Is the Interest Rate?

Your interest rate is how much it costs per year to borrow the money for your loan. It’s expressed as a percentage rate. The interest rate you’re offered will depend on several factors, including market conditions, your credit score, and your down payment.

Each time you make a monthly payment, a portion will go toward paying down your loan balance and a portion will go toward interest.

What Is APR?

What does APR stand for? APR means annual percentage rate and represents the yearly total cost of borrowing money for your home loan. APR includes the interest rate as well as other loan costs, such as origination fees. 

All lenders are required to disclose the APR so borrowers can fully understand their loan costs and compare mortgage offers. You can use an online calculator to see how different loan terms will affect your APR and the overall cost of your mortgage. Just keep in mind that some lenders exclude certain costs from your APR, such as the home appraisal and title insurance fees.

What Is the Difference Between Interest Rate and APR?

Both the interest rate and APR tell you about the cost of borrowing money for your loan, but the APR paints a more complete picture. That’s because APR includes your interest rate as well as other lender charges. If you buy discount points to lower your interest rate, then your APR will reflect that as well.

Comparing Mortgage Interest Rates and APR

Let’s say you’re taking out a 30-year fixed-rate loan to purchase a $400,000 home, and you make a 20% down payment. Loan A has a 5% interest rate, while Loan B has a 5.5% interest rate. Even though Loan B has a higher interest rate, it comes with cheaper lender fees and 1 discount point.

APR vs. Interest Rate Comparison: 30-Year Fixed-Rate Loan for a $400,000 Home

Loan ALoan B
Down payment$80,000$80,000
Loan amount$320,000$320,000
Interest rate5%5.5%
Other lender fees$5,000$3,000
Discount points01
Note: This table is intended to serve as an example of how APR works. It is not intended to be used for financial advice, or to calculate the exact costs of a specific mortgage. The calculations in this example were verified on Nov. 22, 2022.

In the end, Loan A has a lower APR, even though Loan B offers lower lender fees. 

FAQ: Interest Rate vs. APR

Here are the answers to some frequently asked questions about interest rate vs. APR.


Ready for more learning?

Here’s some other helpful articles

Related Articles

**itsHome, a LMB Mortgage Services, Inc. company, is not acting as a lender or broker. The information provided by you to itsHome is not an application for a mortgage loan, nor is it used to pre-qualify you with any lender. If you are contacted by a lender or broker advertising within our network, your quoted rate may be higher depending on your property location, credit score, loan-to-value ratio, debt-to-income ratio, and/or other factors. itsHome does not offer its matching services in all states. This loan may not be available for all credit types, and not all service providers in the itsHome network offer this or other products with interest-only options. The information that we provide is from companies which itsHome and its partners may receive compensation. This compensation may influence the selection, appearance, and order of appearance on this site. The information provided by itsHome does not include all financial services companies or all of their available product and service offerings. We use cookies to track data and provide you with the best possible experience. By proceeding you consent to the use of these cookies. For more information, see our Privacy Policy.

itsHome, a LMB Mortgage Services, Inc. company NMLS #167283,