APR vs Interest Rate Explained

When comparing mortgage offers, you'll see two rates: the interest rate and the APR (Annual Percentage Rate). Understanding the difference is crucial for accurate loan comparison.

Interest Rate

The interest rate is the cost of borrowing the principal loan amount. It determines your monthly principal and interest payment. A lower interest rate means a lower monthly payment.

APR (Annual Percentage Rate)

APR includes the interest rate plus other costs associated with the loan, such as origination fees, discount points, mortgage insurance premiums, and closing costs. APR gives you a more complete picture of the loan's total cost.

Why APR Is Higher Than the Interest Rate

APR is almost always higher than the interest rate because it includes additional fees. The larger the gap between APR and interest rate, the more you're paying in fees. Use APR to compare loans with different fee structures.

Key Takeaway

Use the interest rate to calculate your monthly payment, but use APR to compare the true cost of different loan offers. A loan with a lower interest rate but higher fees may have a higher APR than a competing offer.