Mortgage APR vs. Interest Rate: What’s the Difference?
Understand why a mortgage interest rate and APR are different, what each number includes, and how to use them when comparing loan offers.
Interest rate and APR measure different things
Your mortgage interest rate is the percentage used to calculate interest on the amount you borrow. APR, or annual percentage rate, is designed to express a broader annualized cost of borrowing and can incorporate certain lender charges in addition to interest.
Why APR is often higher
APR can be higher than the note rate because qualifying fees are folded into the annualized borrowing cost. The exact charges included depend on the loan and applicable disclosure rules. That makes APR useful for comparing similar loans, but it is not the same thing as your monthly payment rate.
How to compare two mortgage offers
Compare loans with the same loan amount, term and rate structure. Review the interest rate, APR, lender fees, points, cash needed at closing and projected payment. A lower APR can indicate a lower overall borrowing cost under the assumptions used, but your expected time in the home also matters.
Points and your break-even period
Discount points are upfront charges paid in exchange for a lower interest rate. Divide the upfront cost of the points by the estimated monthly payment savings to approximate how many months it takes to break even. If you sell or refinance before then, paying points may not produce the expected savings.
Educational information only. This article is not individualized financial, investment, tax or legal advice and is not a lender or issuer offer. Review current disclosures from the relevant financial institution before making a decision.