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CHRISTIAN DE ARAUJO/Shutterstock August 10, 2022 Checkmark Bankrate logo How is this page expert verified? At Bankrate, we take the accuracy of our content seriously. "Expert verified" means that our Financial Review Board thoroughly evaluated the article for accuracy and clarity. The Review Board comprises a panel of financial experts whose objective is to ensure that our content is always objective and balanced. Their reviews hold us accountable for publishing high-quality and trustworthy content. Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Casey Fleming is an expert who helps clients understand how the mortgage industry and loan products work, and how to get the best mortgage for their specific needs. Bankrate logo The Bankrate promise
At Bankrate we strive to help you make smarter financial decisions. While we adhere to strict editorial integrity, this post may contain references to products from our partners. Here's an explanation for how we make money. Bankrate logo The Bankrate promise
Founded in 1976, Bankrate has a long track record of helping people make smart financial choices. We’ve maintained this reputation for over four decades by demystifying the financial decision-making process and giving people confidence in which actions to take next. Bankrate follows a strict , so you can trust that we’re putting your interests first. All of our content is authored by and edited by , who ensure everything we publish is objective, accurate and trustworthy. Our mortgage reporters and editors focus on the points consumers care about most — the latest rates, the best lenders, navigating the homebuying process, refinancing your mortgage and more — so you can feel confident when you make decisions as a homebuyer and a homeowner. Bankrate logo Editorial integrity
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You have money questions. Bankrate has answers. Our experts have been helping you master your money for over four decades. We continually strive to provide consumers with the expert advice and tools needed to succeed throughout life’s financial journey. Bankrate follows a strict , so you can trust that our content is honest and accurate. Our award-winning editors and reporters create honest and accurate content to help you make the right financial decisions. The content created by our editorial staff is objective, factual, and not influenced by our advertisers. We’re transparent about how we are able to bring quality content, competitive rates, and useful tools to you by explaining how we make money. Bankrate.com is an independent, advertising-supported publisher and comparison service. We are compensated in exchange for placement of sponsored products and, services, or by you clicking on certain links posted on our site. Therefore, this compensation may impact how, where and in what order products appear within listing categories. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range can also impact how and where products appear on this site. While we strive to provide a wide range offers, Bankrate does not include information about every financial or credit product or service. When shopping for a , it can be difficult to know how to make a true apples-to-apples comparison. Some lenders advertise interest rates that sound much better than their competitors’ and only disclose the APR in the fine print. Learn the difference between APR vs. interest rate so you can be a savvy mortgage borrower and potentially save some money along the way. Lightbulb Key Takeaways An interest rate describes how much interest is charged on a loan APR is the effective interest rate of a loan after accounting for the interest rate and some fees, like origination fees and points When comparing loan offers, it’s best to compare APRs to get a fuller picture of the cost of the loan Interest rates are influenced by factors such as inflation, the economy, market rates, and your credit score What is an interest rate
The attached to a mortgage is a reflection of the cost you’ll pay to borrow the money. With a , the rate never changes for the duration of the loan (for example, 30 years for a 30-year mortgage). The rate on an (ARM) can change at certain intervals based on market conditions. How are interest rates calculated
Interest rates are partially by factors that are completely out of your control, such as inflation, the ups and downs of the broader economy and the lender you choose to work with. Because of these factors, mortgages rates are constantly changing. You might see a rate of 4.98 percent today, only to see 5.25 percent tomorrow. This is why can be a valuable tool. However, you have a big say over your interest rate because lenders take a close look at your financial picture — your credit history, your , your plans for a down payment and other pieces of your life — to set your rate. There is a simple rule with mortgage rates: The higher your credit score, the lower your interest rate will be. What is APR
stands for annual percentage rate, and it represents the cost of your mortgage by including the interest rate and some other and . APR is not the same as your interest rate. For example, if you have to pay an or , those expenses would be included in the APR. The Truth in Lending Act (TILA) requires that mortgage lenders disclose the APR to borrowers. It’s important to note, however, that lenders might not include all fees in the APR — they’re not required to include certain costs such as credit reporting, appraisal and inspection fees. Ask your lender what is and isn’t included in the APR when comparing offers so you have an accurate understanding of how much each loan will cost. How is APR calculated
Determining the APR involves three key figures: the interest rate, fees and any points you choose to pay upfront. You can use to get a sense of how different fees and points can impact the overall cost of your loan. Difference between APR vs interest rate
While both the APR and the interest rate provide benchmarks for you to compare different loans, the key difference between interest rate and APR is that the APR includes many of the other fees you’ll need to pay to get a mortgage. Interest rates are lower than APRs, which is why you’ll often see advertisements for them. For example, consider a 30-year fixed-rate mortgage for a $350,000 home where the buyer is making a 20 percent down payment. The lender advertises an interest rate of 5 percent, but the borrower has to pay a 1 percent origination fee and some other fees that add up to $800. Those extra costs make the APR 5.111 percent. Why is APR higher than the interest rate
The APR of a loan is higher than the loan’s interest rate because it considers multiple costs of borrowing. The interest rate of a loan simply describes the rate at which interest will accrue on the loan’s balance. APR takes interest into account but also adds fees that you have to pay and some other costs. Because you add additional costs to the interest costs, APR will be higher than the simple interest rate. Mortgage example with different rates and APRs
Here are examples comparing different interest rates and APRs for a $300,000, 30-year fixed-rate mortgage: Interest rate 4.5% 4.75% 5% Source: Bankrate Discount points 2 1 0 Points and fees $9,800 $6,800 $800 APR 4.776% 4.945% 5.111% Monthly payment $1,520 $1,564 $1,610 Total paid after 3 years $54,722 $56,337 $57,960 Total paid after 10 years $182,407 $191,392 $193,200 Total paid after 30 years $547,221 $574,178 $579,600 If you’re planning to stay in your home for a shorter period and want to purchase discount points to lower your rate, you need to do the math to determine your break-even point. will help. Simply put, you need to stay in the home long enough to allow enough time for the rate savings to balance out those extra upfront costs. Bottom line
The interest rate of a loan measures how much interest will accrue on the balance while APR accounts for interest plus other fees that you’ll have to pay. Ultimately, that means that APR provides a clearer picture of the cost of borrowing, so you should look at loans’ APRs when you’re comparing multiple offers. SHARE: Bankrate senior editor for mortgages Bill McGuire has been writing and editing for more than four decades at major newspapers, magazines and websites. Casey Fleming is an expert who helps clients understand how the mortgage industry and loan products work, and how to get the best mortgage for their specific needs. Related Articles