When shopping for a mortgage, 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.

Key Takeaways
  • An interest rate describes how much interest is charged on a loan
  • APR is the effective interest rate of a loan after accounting for the interest rate and some fees, like origination fees and points
  • When comparing loan offers, it’s best to compare APRs to get a fuller picture of the cost of the loan
  • Interest rates are influenced by factors such as inflation, the economy, market rates, and your credit score

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.

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.

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.

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.

Difference between 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 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.

Why is APR higher than the interest rate?

The APR of a loan is higher than the loan’s interest rate because it considers multiple costs of borrowing. The interest rate of a loan simply describes the rate at which interest will accrue on the loan’s balance. APR takes interest into account but also adds fees that you have to pay and some other costs. Because you add additional costs to the interest costs, APR will be higher than the simple interest rate.

Mortgage example 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.

Bottom line

The interest rate of a loan measures how much interest will accrue on the balance while APR accounts for interest plus other fees that you’ll have to pay. Ultimately, that means that APR provides a clearer picture of the cost of borrowing, so you should look at loans’ APRs when you’re comparing multiple offers.