APR Vs. Interest Rate: What’s The Difference?

When you’re shopping for a home loan, you’ll see lenders advertise their best mortgage interest rate vs. APR, or annual percentage rate. They’re required to show you both rates, because APR gives you a sense of the lender’s fees in addition to the interest rate. As a borrower, you need to know if a lender is making up for a low advertised interest rate with high fees, and that’s what the APR can tell you. If the APR is close to the interest rate, you’ll know that the lender’s fees are low. We’ll explain how lenders use APR vs. interest rate and how you can use your new understanding of these terms to save money on your home loan. Even if you already think you understand how APR works from your experience with credit cards and auto loans, there’s a lot you may not know about how APR works for home loans.

What Is an Interest Rate?

An interest rate is the cost to borrow money. When you borrow money to buy a home or a car, you pay interest. When you lend money, you earn interest. If you have a savings account or certificate of deposit, you’re lending money to a bank and they’re paying you a small return so you’ll have an incentive to put your money there. Interest is usually expressed as an annual rate. Freddie Mac, which publishes a weekly Primary Mortgage Market survey, found in late August 2020 the U.S. average weekly mortgage rate was 2.91% on a 30-year fixed-rate mortgage.

What Is APR?

APR, or annual percentage rate, is a calculation that includes both a loan’s interest rate and a loan’s finance charges, expressed as an annual cost over the life of the loan. In other words, it’s the total cost of credit. APR accounts for interest, fees and time.

Going back to Freddie Mac’s Primary Mortgage Market survey, there’s an important piece of additional information you need to know: The average interest rate of 2.91% comes with an average of 0.8 fees and points, or $800 for every $100,000 borrowed. So the national average APR on a 30-year fixed-rate home loan was 2.99% at the end of August.

APR vs. Interest Rate: Why These Numbers Matter in a Mortgage

Since APR includes both the interest rate and certain fees associated with a home loan, APR can help you understand the total cost of a mortgage if you keep it for the entire term. The APR will usually be higher than the interest rate, but there are exceptions.

One is a no-closing-cost refinance: In this case, the interest rate and APR will be the same.

Another is an adjustable-rate mortgage (ARM). The APR for an ARM will sometimes be lower than the interest rate. This can happen in a declining interest rate environment when lenders can assume in their advertising that your interest rate will be lower when it resets than when you take out the loan.

However, the APR on an adjustable-rate mortgage is only an estimate, because no one can predict what will happen to interest rates over your loan term. Your APR on an ARM will only be knowable after you’ve paid off the loan. Source

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