Annual Percentage Rate vs. Interest Rate Mortgage

A tablet with the words APR and a pen on top of a deskWhen applying for a mortgage, you'll see two rates quoted: the interest rate and the annual percentage rate (APR). While they sound similar, these rates reflect different costs that make up your loan. Understanding the distinction is critical to comparing mortgage offers accurately.

What is the Interest Rate on a Mortgage?

The interest rate is the cost you pay to borrow money from the lender. It's typically expressed as a percentage of the loan amount. With a mortgage, the interest rate stays constant over the entire loan term on a fixed-rate loan.

For example, if you get a 30-year fixed mortgage with a 6% interest rate, that 6% rate will remain the same year after year. Your monthly principal and interest payments are based on the interest rate. The lower the rate, the less interest you pay over time.

Lenders provide interest rates on mortgage offers. This shows the core price of the money you borrow to purchase the home before additional fees. Comparing interest rates is how you identify the most affordable loan options.

What is the APR on a Mortgage?

While the interest rate shows just the cost of borrowing, the annual percentage rate (APR) reflects the total cost of the mortgage loan, including upfront fees. The APR is always higher than the interest rate because it bundles in lender charges like origination fees, discount points, and other closing costs.

For example, a mortgage offer with a 6% interest rate may have an APR of 6.5% once all loan fees are factored in. The higher APR will increase your total payments over the loan term. But you won't directly feel the impact of the APR on your monthly mortgage payments.

APR allows you to compare actual total loan costs for different lenders and loan types beyond just the interest rate alone. It encompasses all the upfront fees wrapped into the loan amount.

Why Apr Vs. Interest Rate Matters

When you receive a loan estimate or mortgage offer, consider the interest rate and APR. Here is why both matter:

  • The interest rate determines your monthly mortgage payments. So, focus on getting the lowest rate possible to reduce long-term costs.
  • The APR indicates how much total interest fees and closing costs impact the loan expense. Minimizing APR saves money upfront.
  • Comparing APRs helps identify hidden lender fees you can't see in the rates. Ask lenders to explain higher APRs.
  • A fixed interest rate locks in a constant payment. However, variable APRs may change if final closing costs differ.

Understanding how the interest rate and APR contribute to mortgage costs enables you to accurately assess affordability and make informed comparisons when choosing your loan.

Tips for Comparing Mortgage Rates vs. APR

When evaluating mortgage offers, make sure you:

  • Look at interest rates first to find the most affordable payment options.
  • Also, compare APRs between lenders to identify the lowest total loan costs.
  • Ask lenders to explain the higher APRs compared to competitors.
  • Verify if the interest rate and APR quotes are for the same loan term.
  • Understand which closing cost fees are adjustable for potential APR changes.
  • Get a loan estimate from each lender for a standardized rate and APR details.

The interest rate and APR each tell part of the cost story. Analyze both carefully when comparing mortgage offers side-by-side. This ensures you select the most affordable loan overall.

The interest rate dictates your monthly housing costs. However, the APR reveals the entire loan expense. Check both rates when making this significant financial decision so you borrow smart.