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

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When comparing the differences of one mortgage offer versus another, you might be asking yourself: What’s the difference between interest rate and APR? Both percentages help you understand the cost of a mortgage, but they are not the same thing.

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. 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 what isn’t included in the APR when you’re comparing offers so you have an accurate understanding of how much each loan will cost.

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 (e.g., 30 years for a 30-year mortgage). The rate on an adjustable-rate mortgage  (ARM) can change at certain intervals based on market conditions.

APR vs. 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 3.2 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 3.301 percent.

Summary: What’s the difference between APR and interest rate?

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.

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 3.5 percent today, only to see 3.65 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.

Why the length of your loan matters

If you plan to stay in your home for decades, it makes sense to take out a loan that has the lowest APR because you’ll end up paying the least to finance your house. If you don’t plan to stay in the house that long, it may make sense to pay fewer upfront fees and get a higher rate — and a higher APR — because the total cost will be less over the first few years.

“Because APR spreads the fees over the course of the entire loan, its value is optimized only if a borrower plans to stay in the home throughout the entire mortgage,” says Gloria Shulman, founder of CenTek Capital Group in Beverly Hills, California.

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:

Source: Bankrate mortgage APR calculator
Interest rate 3.3% 3.8% 4.3%
Discount points 2 1 0
Points and fees $9,800 $6,800 $3,800
APR 3.558% 3.984% 4.406%
Monthly payment $1,313,87 $1,397.87 $1,484.61
Total paid after 3 years $47,299 $50,323 $53,445
Total paid after 10 years $157,664 $167,744 $178,153
Total paid after 30 years $472,991 $503,235 $534,463

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.

How to compare mortgage offers

The APR and interest rate are the best places to start when comparing mortgages. Bankrate has the latest mortgage rates from multiple lenders, broken out by APR and interest rate and including the costs and estimated monthly payment.

When you see an identical interest rate and APR alongside each other, it’s a signal that the lender is charging no fees, nor are you expected to pay points to qualify for the rate.

One additional piece of data to consider: the eight-year loan cost. Bankrate’s comparison breaks down total payments for the first eight years you live in a home. Since you may not live there for 30 years or you may decide to refinance, taking a look at the cost breakdowns for that early period can be especially helpful.

It’s also important to compare mortgage offers overall, including lender requirements like credit score, down payment and reserve minimums. Keep in mind that your credit score has an outsized effect on the interest rate you qualify for, so if you have work to do to improve your standing, do your best to address that before applying for a loan.

When your credit is in shape, you can (and should) get loan estimates from several lenders, but try to do so within a relatively short window — about 45 days, the Consumer Financial Protection Bureau recommends.

This is because when a lender pulls your credit report, the credit check is added to your credit history, which affects your score. Getting quotes from multiple lenders within a few weeks of each other will only be counted as one inquiry to minimize the hit, so you’re free to compare as many offers as you’re comfortable with. If you want the basis for a more accurate comparison, however, aim to get quotes on the same day, since mortgage rates change day to day, and often multiple times a day.

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Written by
David McMillin
Contributing writer
David McMillin writes about 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
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