APR vs Interest Rate: What's the Difference?
Two numbers appear on every mortgage quote: the interest rate and the APR. They look similar but measure different things, and comparing the wrong one can cost you thousands. This guide explains both and shows when each matters.
APR vs Interest Rate: What's the Difference?
Two numbers appear on every mortgage quote: the interest rate and the APR. They look similar but measure different things, and comparing the wrong one can cost you thousands. This guide explains both and shows when each matters.
The interest rate
The interest rate is the percentage a lender charges on the outstanding balance of the loan. It is the number used in the mortgage formula M = P × r(1+r)^n / ((1+r)^n − 1), so it determines your monthly principal-and-interest payment. A lower rate means a smaller payment and less total interest over the life of the loan.
The APR
The annual percentage rate (APR) expresses the same borrowing cost but folds in the lender fees, discount points and mortgage insurance that the interest rate leaves out. Because those costs are spread over the loan term, the APR is effectively the "all-in" yearly cost of the money you borrow.
Why the APR is usually higher
Every dollar of fees pushes the APR above the interest rate. If you pay one point (1% of the loan) to buy down the rate, the interest rate falls but the APR may stay close to the old rate, because the fee is now included. Only a loan with zero fees has an APR equal to its interest rate.
Which one should you compare?
When two offers have the same term, compare the APR: it is the closest thing to an apples-to-apples number, because it includes the costs that vary between lenders. When you care about the monthly budget, compare the interest rate, because that is what sets the payment. Use both together.
A worked example
Offer A: 6.00% interest with $4,000 in fees. Offer B: 6.25% interest with $500 in fees. The interest rate alone makes A look cheaper, but once the fees are spread across a 30-year loan the APR of B can be lower, because you are not paying $3,500 up front for a quarter-point. Run both through the Mortgage Calculator to compare the monthly payment, then check the APR on each loan estimate.
Watch the term and the fees
An APR is only comparable across loans of the same length: a 15-year APR and a 30-year APR are not equivalent, because the fees are amortised over different periods. Also remember the APR excludes optional products such as title insurance and late fees, so always read the full loan estimate rather than a single number.
Frequently asked questions
Is the APR always higher than the interest rate?
Usually yes, because the APR includes lender fees and points. If a loan has no fees at all, the APR and the interest rate are the same.
Which number should I compare?
Compare the APR when the offers have the same term, because it accounts for fees. Use the interest rate to work out the monthly payment in your budget.
Does the APR include everything I will pay?
No. It covers most lender costs but excludes things like optional insurance, late fees and some third-party charges, so read the loan estimate.
Why did my APR change after I applied?
The APR moves when the rate, points or fees change, for example after a rate lock or a revised fee list. Always compare the latest loan estimate.