When shopping for a mortgage, it can be difficult to know how to make a true apples-to-apples comparison. Understanding the distinction between a loan’s interest rate and annual percentage rate (APR) can make you a more savvy mortgage shopper — and potentially save some money along the way.

Key takeaways

  • The interest rate indicates how much interest you'll pay for the mortgage. The annual percentage rate (APR) is the interest rate plus costs like the origination fee and any points.
  • Interest rates are influenced by factors such as your credit score, the lender you work with, inflation and the economy.
  • When comparing loan offers, it's best to compare APRs to get a fuller picture of the true cost of the financing.

Difference between APR and interest rate

Expressed as a percentage, both the APR and interest rate on a mortgage provide benchmarks for you to compare different loans and their costs.Is the APR the same as interest rate? In short, no.

The key difference is that the APR includes many of the other fees you’ll need to pay to get a mortgage. As such, the interest rate is always going to be lower than the APR.Consider a 30-year fixed-rate mortgage for $280,000. The interest rate is 6.5 percent, but you’ll also pay a 1 percent origination fee, or $2,800. That extra cost makes the APR 6.596 percent.

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.

Let’s say you borrow a $340,000, 30-year fixed-rate mortgage with an interest rate of 6.65 percent. At that rate over three decades, you’d pay $446,295 in interest, on top of the $340,000 you’d repay.

While this sounds like a lot, you’ll pay the same exact amount each month in your mortgage payment, with a portion going to the $340,000 you borrowed — the loan principal — and another portion going to interest. At the beginning of your loan, you’ll pay less toward the principal and more toward interest. As your loan amortizes, your payments gradually start to cover more principal and less interest.

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, mortgage rates are constantly changing. You might see a rate of 6.5 percent today, only to see 6.75 percent tomorrow. This is why mortgage rate locks can be a valuable tool as you shop for a home.

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 financial 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.

To get the lowest rate possible, you can:

What is APR?

APR stands for annual percentage rate. It represents the cost of your mortgage by including the interest rate and some other fees, such as:

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 home 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 on a mortgage 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.

Mortgage interest rate vs APR examples

Here are examples comparing APR vs. interest rate for a $300,000, 30-year fixed-rate mortgage:

Interest rate 6.0% 6.25% 6.5%
Origination fee 1% ($3,000) 1% ($3,000) 1% ($3,000)
Discount points 2 ($6,000) 1 ($3,000) 0
Points and fees $9,000 $6,000 $3,000
APR 6.278% 6.439% 6.596%
Monthly payment $1,799 $1,847 $1,896
Total interest $347,515 $364,976 $382,637

Tips on comparing interest rates vs. APRs

In the interest rate vs. APR conversation, APR gives you a better idea of the real cost of the loan. That doesn’t mean you should disregard the interest rate, however. Both can give you a sense of how much interest you’ll pay along with fees.

Bottom line: Shop around for loan offers before choosing a lender. Taking the time to compare APRs and interest rates will help you land the best possible rate, and could potentially save you thousands over the life of your mortgage.