The Difference Between APR and Mortgage Interest Rate

Differences between APR and mortgage interest rate
What is the best way to compare loans when shopping for a mortgage? photo credit: hjalmeida via Can Stock Photo Inc.

Shopping for a mortgage can be confusing and overwhelming. The internet is oversaturated with advice, and lenders seem to speak a language you don’t understand. What is the difference between APR and mortgage interest rate? How will they actually affect you now, or in the long run?

What Are They?

Let’s take a look at what these terms actually mean:

Mortgage interest rate. The rate of interest on your mortgage is just what it sounds like: It’s the percentage of the mortgage loan that you pay in interest. You can also think of it as the price the lender charges you in exchange for their services—in this case, putting up the amount of money you need for your new home.

Annual Percentage Rate (APR). The APR is related, but slightly more complex. It’s an estimate of the annual cost of the loan overall, including the interest, but it also accounts for additional charges, such as:

  • Closing costs
  • Mortgage interest
  • Origination fees

Though APR is more of an overall picture of total costs, it’s not as exact. It’s an estimate, which makes certain assumptions, e.g., that you’ll stay in the home for the full term of the loan.

It’s also slightly less precise when used for comparison, because different institutions may include or leave out different fees from each other. You can always ask the lenders which fees and costs they include in their APR.

Which One Matters More?

The short answer is—they both matter. And, when shopping for a home loan, you should look at, compare and understand both numbers.

Comparing APRs gives you an idea of how two potential loans differ in overall costs and fees—it’s more “big picture.” Comparing mortgage rates lets you how the monthly payments differ, making it more indicative of the day-to-day costs of your loan.

To make things even more clear, here’s a handy table:

Benefits and Implications of Comparing APR and Mortgage Rates

Difference between APR and mortgage interest rate

Finding all the information available online a bit difficult to sort through? Call our mortgage lending experts at (888) 502-2136 to have a conversation about your options. Or, visit our website to find today’s rate and even apply for a loan online

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