APR vs. Interest Rate
Loan Process
APR vs. Interest Rate
When comparing mortgage offers, two numbers matter most: the interest rate and the APR. Understanding the difference can save you thousands of dollars.
What is the Interest Rate?
The interest rate is the cost of borrowing the principal loan amount, expressed as a percentage. It determines your monthly principal and interest payment. For example, a $400,000 loan at 7% for 30 years = $2,661/month P&I. The interest rate does not include other loan costs.
What is APR?
APR (Annual Percentage Rate) is a broader measure of the cost of a mortgage. It includes the interest rate plus other costs such as origination fees, discount points, mortgage broker fees, and certain closing costs. APR is always equal to or higher than the interest rate.
Which Should I Use to Compare Loans?
Use APR to compare loans with similar terms (same loan amount, same term length). A loan with a lower interest rate but high fees may have a higher APR than a loan with a slightly higher rate but lower fees. However, if you plan to sell or refinance within a few years, the lower-rate/higher-fee loan may actually cost less.
What Affects Your Rate?
Credit score (higher score = lower rate), loan type (VA and conventional rates differ), loan term (15-year rates are lower than 30-year), down payment amount, property type (investment properties have higher rates), and current market conditions (the Fed funds rate, bond market, and inflation all influence mortgage rates).
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