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APR vs. interest rate: What’s the difference?

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When shopping for a home loan, it can be difficult to know how to make a true apples-to-apples comparison. Some lenders advertise interest rates that sound much better than their competitors’ and only disclose the APR in the fine print. Learn the difference between APR vs. interest rate so you can be a savvy mortgage borrower and potentially save some money along the way.

What is an interest rate?

The interest rate attached to a mortgage is a reflection of the cost you’ll pay to borrow the money. With a fixed-rate mortgage, the rate never changes for the duration of the loan (for example, 30 years for a 30-year mortgage). The rate on an adjustable-rate mortgage (ARM) can change at certain intervals based on market conditions.

What is APR?

APR stands for annual percentage rate, and it represents the cost of your mortgage by including the interest rate and some other fees and closing costs.

APR is not the same as your interest rate. For example, if you have to pay an  origination fee or points, those expenses would be included in the APR.

The Truth in Lending Act (TILA) requires that mortgage lenders disclose the APR to borrowers. It’s important to note, however, that lenders might not include all fees in the APR — they’re not required to include certain costs such as credit reporting, appraisal and inspection fees. Ask your lender what is and isn’t included in the APR when comparing offers so you have an accurate understanding of how much each loan will cost.

Difference between APR and interest rate

While both the APR and the interest rate provide benchmarks for you to compare different loans, the key difference between interest rate and APR is that the APR includes many of the other fees you’ll need to pay to get a mortgage. Interest rates are lower than APRs, which is why you’ll often see advertisements for them.

For example, consider a 30-year fixed-rate mortgage for a $350,000 home where the buyer is making a 20 percent down payment. The lender advertises an interest rate of 5 percent, but the borrower has to pay a 1 percent origination fee and some other fees that add up to $800. Those extra costs make the APR 5.111 percent.

How are interest rates calculated?

Interest rates are partially determined by factors that are completely out of your control, such as inflation, the ups and downs of the broader economy and the lender you choose to work with. Because of these factors, mortgages rates are constantly changing. You might see a rate of 4.98 percent today, only to see 5.25 percent tomorrow. This is why mortgage rate locks can be a valuable tool.

However, you have a big say over your interest rate because lenders take a close look at your financial picture — your credit history, your debt-to-income (DTI) ratio, your plans for a down payment and other pieces of your life — to set your rate. There is a simple rule with mortgage rates: The higher your credit score, the lower your interest rate will be.

How is APR calculated?

Determining the APR involves three key figures: the interest rate, fees and any points you choose to pay upfront. You can use Bankrate’s APR calculator to get a sense of how different fees and points can impact the overall cost of your loan.

Example of mortgage with different rates and APRs

Here are examples comparing different interest rates and APRs for a $300,000, 30-year fixed-rate mortgage:

Interest rate 4.5% 4.75% 5%
Source: Bankrate mortgage APR calculator
Discount points 2 1 0
Points and fees $9,800 $6,800 $800
APR 4.776% 4.945% 5.111%
Monthly payment $1,520 $1,564 $1,610
Total paid after 3 years $54,722 $56,337 $57,960
Total paid after 10 years $182,407 $191,392 $193,200
Total paid after 30 years $547,221 $574,178 $579,600

If you’re planning to stay in your home for a shorter period and want to purchase discount points to lower your rate, you need to do the math to determine your break-even point. Bankrate’s mortgage points calculator will help. Simply put, you need to stay in the home long enough to allow enough time for the rate savings to balance out those extra upfront costs.

Written by
David McMillin
Contributing writer
David McMillin is a contributing writer for Bankrate and covers topics like credit cards, mortgages, banking, taxes and travel. David's goal is to help readers figure out how to save more and stress less.
Edited by
Mortgage editor
Reviewed by
Mortgage advisor and author