APR vs. Interest Rate: Key Differences

What Is a Mortgage Interest Rate?

An interest rate is the amount you pay your mortgage lender for borrowing money from them to finance your home loan. 

Market interest rates, the rates a lender has available for a new loan application, change regularly, and a higher interest rate means you’ll pay more over the life of your loan.

What Is a Mortgage APR?

The annual percentage rate (APR) provided by a mortgage lender expresses the cost of interest and certain other expenses of a mortgage. It includes the interest rate charged on the principal balance as well as certain other costs and lender fees. Expressed as a percentage, APR provides a broader measure of borrowing costs, which can help you compare lender offers

A mortgage APR can include:

• Interest charges: This is the cost you’re charged to borrow money, based on the loan’s interest rate.
• Discount points: Some mortgages require you to pay points (prepaid interest) to get a specific interest rate, and some borrowers choose to pay them in exchange for a lower interest rate. One point is equal to 1% of the loan amount. If you’re paying for mortgage discount points on your loan, these costs are included in the APR.
• Lender fees: These are sometimes called origination fees and may be charged by lenders to process your loan application. These can be a percentage of the loan amount and are included in the APR.
• Mortgage insurance: If a loan requires you to pay for mortgage insurance, the cost is included in its annual percentage rate.
• Other closing costs: Certain costs associated with obtaining the mortgage may also be included in the APR calculation. Not every closing cost is included, so review your loan documents to see which charges factor into your APR.

APR vs. Interest Rate for Determining Home Affordability

Both APR and interest rate can help you evaluate the cost of a mortgage and how it fits into your homebuying budget. Your interest rate and your unpaid principle balance are used to calculate your monthly principal and interest payment, while APR provides a broader view of borrowing costs.

Depending on your mortgage, rates may be fixed or variable. However, neither APR nor interest rate captures the full cost of owning a home, which can also include property taxes, homeowners insurance, mortgage insurance, maintenance, and other expenses.

The key difference is what each includes: interest rate reflects the interest cost of borrowing the principal, while APR also incorporates certain loan fees and costs. Lenders are required to disclose APR, making it useful for comparing loan offers and better understanding the true cost of borrowing.

Why Is APR Usually Higher Than Interest Rate?

APR is usually higher than the interest rate because it reflects the interest charged on your mortgage in addition to certain costs associated with getting the loan. Your mortgage interest rate, on the other hand, only reflects the rate charged on the loan principal. 

Because APR accounts for additional borrowing costs, it can give you a broader picture of what a mortgage costs and may be helpful when comparing loan offers.

Example: Mortgage Interest Rate vs. APR

Let’s look at two sample mortgage offers to compare APR vs. interest rate and see how APR helps you better understand the cost of a home loan. For this hypothetical example, we’ve assumed that the borrower is:

• Buying a house with a conventional, 30-year, fixed-rate mortgage.
• Borrowing $200,000.
• No private mortgage insurance.

Hypothetical example for illustrative purposes only; not a commitment to lend or an offer of currently available terms. Rates, payments, terms, and savings shown are hypothetical figures selected solely to illustrate how mortgage costs and terms can vary, and do not reflect an actual loan offer.

Mortgage A offers a lower interest rate, but it also has higher upfront costs, including two points resulting in an APR of 6.278%. Mortgage B has lower upfront costs, resulting in an APR that’s closer to the interest rate. Comparing APR alongside interest rates can give you a more complete picture of each loan's cost.

Final Thoughts: APR, Interest Rate, and Your Mortgage

APR and interest rates work hand in hand to help you determine the true cost of your mortgage. The interest rate shows what you’re being charged to borrow the loan’s principal balance, while the APR gives you a more inclusive understanding of the overall cost to borrow, including the interest rate plus certain fees and other costs and is especially helpful when comparing the borrowing cost of one loan against another.

Comparing rates is a good place to start on your homebuying journey, as it will help you find the right loan for your budget and long-term goals. When you’re ready to explore loan options and find the personalized interest rate, APR, and loan program we may be able to offer you, get prequalified with Freedom Mortgage today.