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 additional fees 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.
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.
Difference between APR and interest rate
Key terms
- Interest rate
- The price you pay to borrow money for a mortgage, expressed in the form of a percentage of the loan principal
- Annual percentage rate (APR)
- A percentage that indicates the total yearly cost of your loan; it includes your interest rate, as well as the other fees you'll pay for the mortgage
Expressed as a percentage, both the annual percentage rate (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.
For example, let’s consider a 30-year fixed-rate mortgage for $300,000 at 7.8 percent interest. Let’s also say you’ll pay a 1 percent origination fee ($3,000) and buy one mortgage point (another $3,000) for a total of $6,000 in fees. That extra cost makes the APR 8.01 percent.
What is an interest rate?
The interest rate attached to a mortgage is a reflection of the cost you’ll pay to finance the home purchase. Let’s say you borrow a $340,000, 30-year fixed-rate mortgage with an interest rate of 7.80 percent. At that rate over three decades, you’d pay $541,721 in interest, on top of the $340,000 of the loan itself.
While this sounds like a lot, you’ll pay the same exact amount each month in your mortgage payment, with a portion of each payment 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.
Bankrate insights
With a fixed-rate mortgage, the rate never changes for the duration of the loan (for example, 30 years for a 30-year mortgage). In contrast, the rate on an adjustable-rate mortgage (ARM) can change at certain intervals, going up or down in reflection of overall 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 state 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 7.8 percent today, only to see 8 percent tomorrow.
In the current economic environment, rates are close to or exceeding 20-year highs. Every time rates move up, it impacts how much home you can afford. This is why mortgage rate locks can be a valuable tool as you shop for a home.
That’s on the macro level. On the micro level, your particular mortgage rate reflects your personal finances. Lenders take a close look at your financial profile — 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:
- Buy mortgage points
- Improve your credit score
- Make a bigger down payment
- Pay down or eliminate high-interest debt
- Get a first-time homebuyer loan (provided you qualify)
What is an APR?
APR stands for annual percentage rate. It represents the cost of your mortgage by including the interest rate and some other fees (the latter annualized), such as:
- Closing costs
- Origination fee
- Mortgage points
- Mortgage insurance
- Mortgage broker fees
- Prepaid interest
Bankrate insight box: The Truth in Lending Act (TILA) requires that mortgage lenders disclose a loan’s APR, as well as its interest rate, to borrowers. It’s important to note 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’s 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. Let’s look at the example we used above. The interest rate of 7.8 percent makes up the majority of the APR. Fees and discount points contributing to the remaining 0.207, to arrive at 8.007 percent.
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 | 7.5% | 7.75% | 8.0% |
|---|---|---|---|
| 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 | 7.805% | 7.957% | 8.105% |
| Monthly payment (principal and interest) | $2,098 | $2,149 | $2,201 |
| Total interest | $455,155 | $473,721 | $492,471 |
Tips on comparing interest rates vs. APRs
In the interest rate vs. APR conversation, there are a few tips you should follow:
- APR gives you a better idea of the real cost of the loan. Because it includes fees, you’ll have a better idea how much you’ll actually pay when you compare APRs.
- Shop around for loan offers before choosing a lender. Some lenders may have a low interest rate, but higher upfront fees. Others may charge more interest, but don’t impose fees. Taking the time to compare offers could save you lots of money over the life of your mortgage.
- Be careful comparing fixed-rate mortgage rates and ARM rates. The rate quoted for an ARM is the introductory rate, which is only fixed for a set period. That means, after that period, the rate could go up, and so will your payment. Fixed-rate mortgages keep the same rate, so your principal and interest payment will stay the same every month.
- The APR of an ARM doesn’t reflect the maximum interest rate for the loan. After the introductory rate ends, your rate could adjust up significantly depending on the market and the rate caps in your ARM. Read our article on how ARMs work to learn more.
FAQ: Interest rate vs. APR
A good interest rate is any rate that’s below the current daily market average. As of this writing, the average interest rate on a 30-year fixed-rate mortgage is 7.85 percent.
Remember that interest rates fluctuate daily depending on the market. Also, you’ll be quoted a different rate depending on your financials and the loan type.
Like a good interest rate, a good APR is an APR that is below the current market average. As of the writing of this article, the national average 30-year fixed mortgage APR is 7.87 percent.
The APR cannot be less than the interest rate because it’s composed of several components besides the interest rate (though interest is the main one). An APR can be equal to an interest rate if no additional fees are being charged.
0% APR means you pay no interest or fees for the debt. 0% APR offers are usually on credit cards or other types of financing — not mortgages. 0% APR is used as a promotional offer, meaning that after the promotion is over, interest will be charged on the debt.
In most scenarios, your quoted rate won’t change when you lock it, for as long as the lock lasts. In this uncertain rate environment, locking your rate can provide you peace of mind.
However, there are instances where your rate can change between locking your rate and closing on your mortgage. Some of these are:
- The appraised value of your home is lower or higher than the amount you locked at.
- You decide to apply for a different loan type.
- Your lender was unable to document some of your income during underwriting, such as overtime or bonus pay.
- Your credit score changes during underwriting.
Rate lock policies aren’t standardized by lenders. When deciding whether to lock your rate, ask your lender about:
- How much a rate lock costs
- How long it lasts (and if there’s a fee to extend it)
- What conditions can cause the locked rate to change
