The Difference Between Interest Rate and APR

Interest rate and APR are two terms that often get lumped together. In some instances, they are in fact the same thing, but when it comes to mortgages, they mean two different things. This certainly does make it more confusing, doesn't it? Understanding the difference between the two can help home buyers compare different mortgage loan programs. 

What Is Interest Rate?

Interest rate has a clear-cut definition and is exactly what most people assume. It is the percentage charged annually against the balance of a mortgage. It is charged in monthly increments, so the percentage is divided by 12 months. When requesting quotes from mortgage lenders, they will typically provide the interest rate percentage.

What Is APR in Mortgage Lending?

APR, or annual percentage rate, in mortgage terms is just slightly different than interest rate. As you may know, mortgage loans have closing costs. You may see some with high interest rates and low closing costs, and vice versa. APR doesn't have any separate meaning when it comes to credit cards since they don't have closing costs. However, in the mortgage world, closing costs are a factor. So, how can borrowers accurately compare interest rate and closing cost combinations? That's where APR comes in.

APR takes into account the overall cost of a loan. It essentially lumps certain closing costs in with interest payments to determine that actual percentage rate paid. So, by using APR to compare different loan options, borrowers can better understand the overall cost of each loan. This is the difference between interest rate and APR.

More on the Difference Between Interest Rate and APR

Knowing the difference between interest rate and APR when it comes to mortgage loans will help you make better home buying decisions. Most lenders offer many different loan programs that look similar on the surface, but APR could tell you otherwise. For additional tips on mortgages and home buying, contact our team. We look forward to an opportunity to assist you with your home purchase!



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