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

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.

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.

What is more important, APR or the interest rate?

Both the interest rate and APR on a mortgage are important details about the cost of your home loan. However, the APR is a more accurate measure of these costs because it includes the interest rate as well as other charges.

Why is the APR on a loan higher than the interest rate?

You can expect the APR on a loan to be higher because it includes the interest rate as well as other fees and charges.

How do I lower my APR?

One way to lower your APR is to work on getting a lower interest rate. Your credit score is a major factor that affects the interest rate you’re offered, so you can aim to improve your credit. Another way to get a lower interest rate is to make a larger down payment or select a shorter loan term.

APR is also determined by the fees that different lenders charge. Be sure to shop around and compare loan estimates to find lenders with fewer added costs.