What are the Differences Between Your Mortgage Interest Rate and APR?

Estimated reading time: 2 minutes

When shopping for a loan or a new line of credit, you’ll probably see references to APR and interest rates. While these terms refer to similar concepts, there are subtle but important differences when it comes to borrowing money.

What is an Interest Rate?

Your interest rate is essentially the price you pay to borrow money and is expressed as a percentage. As a borrower, you’re responsible for paying back your loan’s principal and interest. The rate may be fixed and stay the same throughout the life of the loan or be adjustable and change after a fixed period, based on a schedule.

What is APR?

APR, also known as an annual percentage rate, is a yearly measurement of interest and costs associated with receiving your loan. This could include any origination fees or mortgage points. Because of these additions, your APR is usually higher than your interest rate.

What are the Differences Between an Interest Rate and APR?

Your interest rate is determined by a combination of factors, some that are in your control and others that aren’t. Factors like your credit score, debt-to-income ratio, and your down payment amount are all aspects a borrower can leverage to get a favorable rate.

On the other hand, a loan’s APR includes your interest rate as well as necessary fees charged by your mortgage lender. With these inclusions, you’ll have a better idea of how much you’ll pay for your loan.

Should You Consider a Loan’s Interest Rate or the APR?

Both the interest rate and APR of a loan should be considered. The Federal Truth in Lending Act requires every consumer loan agreement to disclose the APR on the loan estimate. As all lenders are required to follow the same rules about disclosing a loan’s APR, you can use this to compare certain loan costs.

However, your monthly payment is based on your interest rate and not the APR, making it the more accurate measurement for your affordability.

Here to Demystify the Process

The mortgage process doesn’t have to be stressful! With a Loan Originator from Homestead Funding by your side, you’re setting yourself up for home financing success. Contact us today to connect!