When buying a home loan, it can be difficult to know how to make a real apples-to-apples comparison. Some lenders advertise rates that sound much better than their competitors and only include APR in the fine print. Learn the difference between APR and interest rates so you can become a savvy mortgage borrower and potentially save some money in the process.
What is an interest rate?
The interest rate associated with a mortgage reflects the cost you have to pay to borrow the money. For fixed-rate mortgages, the interest rate does not change over the life of the loan (for example, 30 years for a 30-year mortgage). Adjustable Rate Mortgage (ARM) rates may change periodically based on market conditions.
What is APR?
APR stands for Annual Interest Rate and represents the cost of your mortgage by including the interest rate and some other fees and settlement costs.
APR is not the same as your interest rate. For example, if you have to pay registration fees or credits, those fees are included in the APR.
The Truth in Lending Act (TILA) requires mortgage lenders to disclose APRs to borrowers. However, it’s important to note that lenders may not include all fees in the APR — they don’t need to include certain costs, such as credit report, appraisal, and inspection fees. When you’re comparing deals, ask your lender what’s and isn’t included in your lender’s APR, so you can see exactly how much each loan costs.
Difference Between APR and Interest Rate
While both APR and APR provide benchmarks that you can use to compare different loans, the main difference between APR and APR is that APR includes many other fees you must pay to get a mortgage. Interest rates are lower than APR, which is why you will often see their ads.
For example, imagine a 30-year fixed-rate mortgage on a $350,000 home with a buyer paying a 20% down payment. The lender advertises a 5% interest rate, but the borrower has to pay a 1% fee and a few other fees, totaling $800. These additional costs represent 5.111% of the APR.
How is interest calculated?
The interest rate depends in part on factors beyond your control, such as: B. Inflation, the ebb and flow of the general economy, and the lenders you work with. Due to these factors, mortgage rates are constantly changing. You might see an interest rate of 4.98% today and 5.25% tomorrow. For this reason, a mortgage rate lock can be a valuable tool.
However, you do have a lot of say when it comes to interest rates, as lenders keep a close eye on your finances—your credit history, your debt-to-income (DTI), your down payment plan, and the rest of your life—set up Set your interest rate. A simple rule applies to mortgage rates: The higher your credit rating, the lower your interest rate.
How is APR calculated?
Determining your APR involves three metrics: interest rate, fees, and anything you want to pay up front. You can use APR calculator to see how different fees and points affect your total loan cost.
Examples of Mortgage Loans with Different Rates and APRs
The following example compares various rates and APRs for a $300,000, 30-year fixed-rate mortgage:
| INTEREST RATE | 4.5% | 4.75% | 5% |
|---|---|---|---|
| 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 |
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