What Is the Difference Between an Interest Rate and APR?

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When shopping for a mortgage, you’ll likely hear lenders talk about the interest rate and the annual percentage rate, or APR. Both figures are used to express the cost of a loan, but they’re not the same thing. Here’s what you should know about the difference between interest rate and APR.

What Is the Interest Rate?

The interest rate represents the cost you’ll pay annually to take out the loan, which is in addition to the amount being borrowed. This is the lender’s basic fee for lending you the money. Lenders set interest rates based on market conditions and the borrower’s information.

Some of the individual factors that affect what interest rate a lender will offer include:

Interest rates also are affected by economic conditions. The Federal Reserve may increase or decrease the federal funds rate to stabilize the economy. If the Fed increases interest rates, then it costs more to borrow money. If interest rates decrease, then rates for a home loan will decline.

What Is APR?

APR also represents the cost of borrowing money, but it includes the interest rate as well as additional loan costs, such as mortgage insurance, discount points, and other charges. Because it’s a broader measure of what you have to pay, the APR on a loan is typically higher than the interest rate.

Lenders are required to disclose the APR on a loan to borrowers. Lenders also are required to follow accuracy standards when reporting the APR, which makes it easier for borrowers to compare the APR on different loans.

APR vs. Interest Rate

When you compare your interest rate vs. APR, keep in mind that the APR gives you a fuller picture of all the costs associated with a loan. Even if the interest rate looks good, it may not include all the related costs. For a complete list of additional fees, consult the good faith estimate that your lender is required to give to you.

Tip: As you compare different loan options by APR, make sure the loans are similar. For example, a longer-term fixed-rate loan is going to come with a different APR than a shorter-term adjustable-rate loan.

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