APR and interest rate
When you compare mortgage offers, you'll see two key numbers: the interest rate and the annual percentage rate (APR). The interest rate is the cost of borrowing money, expressed as a percentage, and it does not include fees or other charges. Your monthly payment is based on this interest rate.
The APR, on the other hand, is a broader measure of the cost of borrowing. It includes the interest rate plus certain fees and costs you pay to get the loan, such as points and broker fees. Because of these added costs, the APR is usually higher than the interest rate.
Sources: Consumer Financial Protection Bureau, Rocket Mortgage, First National Bank of Omaha
Key Differences Between APR and Interest Rate
The most important difference is that the interest rate only reflects the cost of borrowing the principal, while the APR includes the interest rate plus certain upfront fees. This means that when you compare loans with the same interest rate but different fees, the APR will be higher for the loan with higher fees.
On a Loan Estimate, you'll find the interest rate on page 1 under 'Loan Terms' and the APR on page 3 under 'Comparisons'.
- Interest rate: the percentage you pay on your mortgage principal; determines your monthly payment.
- APR: interest rate plus certain fees that are spread across the loan term, giving you a broader measure of the cost of borrowing.
Sources: Consumer Financial Protection Bureau, Rocket Mortgage, First National Bank of Omaha
What Fees Are Included in APR?
APR includes the interest rate plus points, mortgage broker fees, and certain other charges paid to obtain the loan, as defined by the Truth in Lending Act. These costs are spread across the loan term, which means the APR gives you an idea of the total cost of the loan on an annual basis.
While lenders must follow federal guidelines, the specific fees included can vary somewhat by lender. Always review the Loan Estimate to see what fees are listed.
- Origination fees
- Discount points
- Broker fees
- Mortgage points
Sources: Consumer Financial Protection Bureau, Rocket Mortgage, First National Bank of Omaha, Bankrate
How APR Affects Monthly Payment and Total Loan Cost
Your monthly mortgage payment is based on the interest rate, not the APR. The APR is a tool to help you evaluate the relative cost of different loans because it factors in both the interest rate and certain upfront costs. A loan with a higher APR may have higher fees, so it can be more expensive overall even if the monthly payment is similar.
When comparing two loans with the same interest rate, the one with the lower APR generally has lower fees and is less expensive overall.
Sources: Rocket Mortgage, First National Bank of Omaha
Why APR Is Important When Comparing Loans
APR is important because it helps you see the full picture of a loan's cost. For example, a loan with a lower interest rate but high fees could end up being more costly than a loan with a slightly higher rate and lower fees. Comparing APRs helps you evaluate which offer is truly cheaper.
The Truth in Lending Act requires lenders to disclose both the interest rate and the APR on mortgage loan offers, so you can make an informed comparison. You can also negotiate fees and points, which can affect the APR.
Sources: Rocket Mortgage, First National Bank of Omaha, Consumer Financial Protection Bureau
Example: Comparing Two Loan Offers with Different APRs
Here is an example with two loan offers that have the same interest rate but different APRs. Loan A has higher closing costs, leading to an APR of 6.72%, while Loan B has lower closing costs, leading to an APR of 6.56%. Because the interest rates are the same, the loan with the lower APR (Loan B) is less expensive overall. These figures are illustrative only and not actual current offers.
This illustrates why APR is useful when comparing offers that appear similar at first glance.
| Loan Offer | Interest Rate | APR | Closing Costs |
|---|---|---|---|
| Loan A | 6.50% | 6.72% | Higher |
| Loan B | 6.50% | 6.56% | Lower |
Sources: First National Bank of Omaha
APR vs. Interest Rate: Which One Should You Focus On?
When comparing mortgage offers, look at both the interest rate and the APR. The interest rate determines your monthly payment, while the APR gives you a fuller sense of the total cost, including certain fees. A lower APR generally means a less expensive loan, but also consider the fees themselves and your plans for the loan.
For example, if you plan to stay in the home for a short time, a loan with a lower interest rate but higher fees might be better, even if the APR is higher. Conversely, if you plan to stay for a long time, a lower APR could save you more over the life of the loan.
Sources: Rocket Mortgage, First National Bank of Omaha
Side-by-Side Category and Decision-Criteria Matrix
To evaluate mortgage offers, it helps to compare them across categories: the interest rate (cost of borrowing), the APR (total cost including certain fees), and the fees themselves (upfront costs). The table below summarizes the key decision criteria in each category.
| Criterion | Interest Rate | APR | Fees |
|---|---|---|---|
| Category | Cost of borrowing | Total cost including some fees | Upfront costs |
| What it shows | Interest charged on principal | Annualized cost with fees | Charges paid at closing |
| Basis for monthly payment | Yes | No | No |
| Use for comparing | Monthly payment comparison | Overall cost comparison | Short-term cost |
| Typical value | Varies by lender and market | Higher than interest rate | Varies by lender and market |
Sources: Consumer Financial Protection Bureau, Rocket Mortgage
Frequently asked questions
Is a lower APR always better?
Not necessarily. A lower APR generally means lower total borrowing costs, but it may come with higher upfront fees or a different interest rate that could affect your monthly payment. If you plan to sell or refinance within a few years, a loan with a lower interest rate and higher upfront fees (thus a higher APR) might result in lower total cost over that period.
Sources: First National Bank of OmahaCan I negotiate the APR on a mortgage?
Yes, you can shop around and negotiate with lenders. By comparing multiple offers and understanding the fees included in the APR, you can potentially lower the APR or the costs that affect it.
Sources: First National Bank of Omaha, BankrateDoes APR include closing costs?
APR includes certain closing costs, such as origination fees and discount points, as defined by TILA, but not all closing costs. The specific composition can vary by lender, so it's important to review the Loan Estimate.
Sources: Consumer Financial Protection Bureau, BankrateHow is APR calculated?
APR is calculated by spreading the interest rate plus certain fees and points across the loan term, expressed as an annual percentage. The calculation includes the loan amount, interest, fees, and loan term. The exact method is prescribed by federal law, so it provides a consistent basis for comparing loan offers.
Sources: Rocket Mortgage, BankrateSources
- What is the difference between a mortgage interest rate and an APR? — Consumer Financial Protection Bureau
- APR vs. interest rate: What's the difference? — Rocket Mortgage
- APR vs. interest rate: What’s the difference? — Bankrate
- Interest Rate vs. APR: What's the Difference on a Mortgage? — First National Bank of Omaha