{"id":50168,"date":"2021-04-19T05:03:43","date_gmt":"2021-04-19T13:03:43","guid":{"rendered":"https:\/\/www.credible.com\/blog\/?p=50168"},"modified":"2023-03-21T09:58:34","modified_gmt":"2023-03-21T16:58:34","slug":"apr-vs-interest-rate-understanding-the-difference","status":"publish","type":"post","link":"https:\/\/www.credible.com\/blog\/mortgages\/apr-vs-interest-rate\/","title":{"rendered":"APR vs. Interest Rate: Understanding the Difference"},"content":{"rendered":"<p>When you\u2019re shopping for a <a href=\"https:\/\/www.credible.com\/mortgage\">home loan<\/a>, you\u2019re bound to come across two numbers: the interest rate and the annual percentage rate (APR).<\/p>\n<p>These numbers help you determine how much you\u2019ll pay to borrow money from a lender, but they\u2019re not the same. Knowing the difference between the two is important as you begin to shop around.<\/p>\n<p><b>Here\u2019s how an interest rate and APR compare:<\/b><\/p>\n<ul>\n<li><a href=\"#mortgage-rate\">What is a mortgage interest rate?<\/a><\/li>\n<li><a href=\"#apr\">What is APR?<\/a><\/li>\n<li><a href=\"#difference-rate-apr\">The difference between interest rate and APR<\/a><\/li>\n<li><a href=\"#comparing-loans-interest-rate-apr\">Comparing home loans using interest rate and APR<\/a><\/li>\n<li><a href=\"#mortgage-rate-apr-important\">Low mortgage rate vs. low APR: What\u2019s more important?<\/a><\/li>\n<\/ul>\n<p><a name=\"mortgage-rate\"><\/a><\/p>\n<h2>What is a mortgage interest rate?<\/h2>\n<p>The <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/mortgage-rate\/\">interest rate<\/a> is the cost you pay every year to take out a home loan. It doesn\u2019t include extra fees or charges you may pay your lender to borrow the money. The rate can be variable or fixed, but it\u2019s always expressed as a percentage.<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><b>For example:<\/b> Let\u2019s say you take out a 30-year mortgage worth $160,000 with a fixed interest rate of 3%. During your first year in the mortgage, you would pay $4,754 toward interest.<\/div><\/div>\n<h3>How your interest rate is determined<\/h3>\n<p>Lenders take various factors into account when setting your mortgage rate. They look at the overall economy, as well as your personal financial situation.<\/p>\n\n<table id=\"tablepress-259\" class=\"tablepress tablepress-id-259 table table-border-top table-rounded table-no-img-margin table-capitalized-column-titles\">\n<thead>\n<tr class=\"row-1\">\n\t<th class=\"column-1\"><strong>Larger economic factors<\/strong><\/th><th class=\"column-2\"><strong>Personal economic factors<\/strong><\/th>\n<\/tr>\n<\/thead>\n<tbody class=\"row-striping row-hover\">\n<tr class=\"row-2\">\n\t<td class=\"column-1\"><div style=\"text-align: left; padding:0px 25px;\"><ul><li>Strength of the economy<\/li><li>Inflation rates<\/li><li>Employment<\/li><li>Consumer spending<\/li><li>Housing construction and other market conditions<\/li><li>Stock and bond markets<\/li><li>10-year Treasury yields<\/li><li>Federal Reserve policies<\/li><\/ul><\/div><\/td><td class=\"column-2\"><div style=\"text-align: left; padding:0px 25px;\"><ul><li>Credit score<\/li><li>Credit history<\/li><li>Down payment size<\/li><li>Loan-to-value ratio<\/li><li>Loan size, type, and term<\/li><li>Debt-to-income ratio<\/li><li>Location of the property<\/li><\/ul><\/div><\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n<p>While you don\u2019t have much control over the economy, you can take steps to improve your financial situation and get a better mortgage rate. For example, you can:<\/p>\n<ul>\n<li>Work on <a href=\"https:\/\/www.credible.com\/blog\/personal-finance\/improve-credit-score\/\">improving your credit score<\/a><\/li>\n<li>Increase your down payment, which reduces risk for the lender<\/li>\n<li>Buy a less expensive home, which reduces the amount you borrow<\/li>\n<li>Work on your <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/dti-for-mortgage\/\">debt-to-income ratio<\/a> by paying down debt or increasing your income<\/li>\n<\/ul>\n<p><a name=\"apr\"><\/a><\/p>\n<h2>What is APR?<\/h2>\n<p>The <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/mortgage-apr\/\">annual percentage rate<\/a>, or APR, provides a broader measure of the cost of borrowing money. The APR includes the interest rate along with other charges you might pay for the loan.<\/p>\n<p>Because it includes costs beyond the interest rate, your APR is usually higher. In addition to the interest rate, the following costs may be baked into your APR:<\/p>\n<ul>\n<li><a href=\"https:\/\/www.credible.com\/blog\/mortgages\/mortgage-points\/\">Discount points<\/a><\/li>\n<li>Mortgage brokerage fees<\/li>\n<li><a href=\"https:\/\/www.credible.com\/blog\/mortgages\/origination-fees\/\">Origination fees<\/a><\/li>\n<li>Private mortgage insurance<\/li>\n<\/ul>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><b>For example: <\/b>Take a look at the home loan from the example described earlier. With a 30-year home loan for $160,000, you\u2019re paying $4,754 toward interest in year one. But say your lender also charges you $2,800 upfront in origination fees and discount points. That means your mortgage costs are actually $7,554.<\/p>\n<p>By spreading the fees over the course of your loan term, the APR takes that upfront cost and helps you better measure it against other mortgage offers.<\/div><\/div>\n<h3>How your APR is determined<\/h3>\n<p>The annual percentage rate is determined by your financial institution, since it\u2019s composed of costs that vary from lender to lender.<\/p>\n<p>According to the Truth in Lending Act (TILA), your lender must disclose the APR in all of your mortgage documents. But they might not include every fee in the APR.<\/p>\n<p>To understand what you\u2019re paying for, ask your lender to explain how it calculates your rate.<br \/>\n<a name=\"difference-rate-apr\"><\/a><\/p>\n<h2>The difference between interest rate and APR<\/h2>\n<p>The difference between an APR and mortgage interest rate is relatively straightforward. Here\u2019s a quick breakdown of how the two costs differ:<\/p>\n<ul>\n<li><b>Interest rate: <\/b>Annual cost you pay to borrow money<\/li>\n<li><b>APR: <\/b>Annual cost you pay to borrow money, plus other charges<\/li>\n<\/ul>\n<p>In short, think of the APR as your interest rate plus other charges you\u2019ll have to pay to get that loan. While the difference between the two might seem small, it can have a significant impact on your total costs.<\/p>\n<p>Comparing APRs across loan offers can give you a better idea of what you\u2019ll pay on a home loan.<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><b>Tip: <\/b>Some costs, such as the following, are generally not included in either the interest rate or APR:<\/p>\n<ul>\n<li>Title or abstract fee<\/li>\n<li>Notary fee<\/li>\n<li>Closing agent or title attorney<\/li>\n<li>Home inspection<\/li>\n<li>Recording fee<\/li>\n<li>Transfer taxes<\/li>\n<li>Credit report review<\/li>\n<li>Appraisal<\/li>\n<\/ul>\n<\/div><\/div>\n<p>Credible helps give you a better sense of what you\u2019ll pay in total for a home loan from one of our partner lenders by displaying the APR. This makes it easier to compare loans and lenders as some have more fees than others.<\/p>\n<p><div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><\/p>\n<h3><span style=\"font-size: x-large;\"><strong>Credible makes finding a mortgage easy<\/strong><\/span><\/h3>\n<h6 class=\"accent--isGrayLight\">Compare prequalified mortgage rates from top lenders in just 3 minutes.<\/h6>\n<ul class=\"list--iconArrow accent--isGreen list--iconCheckmarkSolidCircle\">\n<li>Personalized rates, not generic<\/li>\n<li>One simple, safe TLS-encrypted form<\/li>\n<li>No spam calls from lenders<\/li>\n<li>Checking rates is free, with no commitment<\/li>\n<\/ul>\n<p style=\"text-align: center;\"><a class=\"btn btn-warning\" href=\"https:\/\/www.credible.com\/mortgage\/form\/property-stage?utm_source=wp-credible&amp;utm_medium=mp-box-cta&amp;utm_campaign=seo\" target=\"_blank\" rel=\"noopener\">Find My Rate<\/a><br \/>\n<!-- TrustBox widget - Micro Combo --><\/p>\n<div class=\"trustpilot-widget\" data-locale=\"en-US\" data-template-id=\"5419b6ffb0d04a076446a9af\" data-businessunit-id=\"5536ec090000ff00057eebe7\" data-style-height=\"20px\" data-style-width=\"100%\" data-theme=\"light\"><a href=\"https:\/\/www.trustpilot.com\/review\/www.credible.com\" target=\"_blank\" rel=\"noopener noreferrer\">Trustpilot<\/a><\/div>\n<p><!-- End TrustBox widget --><\/p>\n<p><\/div><\/div><\/p>\n\n<p><a name=\"comparing-loans-interest-rate-apr\"><\/a><\/p>\n<h2>Comparing home loans using interest rate and APR<\/h2>\n<p>The best way to compare loan terms is by submitting mortgage applications and requesting a <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/loan-estimate-closing-disclosure\/\">loan estimate<\/a>. Lenders are required to give you this document within three days of applying for a mortgage.<\/p>\n<p>The loan estimate lists important details, including your:<\/p>\n<ul>\n<li>Closing costs<\/li>\n<li>Monthly mortgage payment<\/li>\n<li>Interest rate<\/li>\n<li>APR<\/li>\n<li>Estimated taxes and insurance<\/li>\n<\/ul>\n<p>The loan estimate tells you if your loan amount, interest rate, and monthly payment can change after you close on the loan.<\/p>\n<p>You can find the interest rate on page 1 of the loan estimate under \u201cLoan Terms.\u201d<\/p>\n<p><a href=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-1-APR-vs.-Interest-Rate.png\"><img fetchpriority=\"high\" decoding=\"async\" class=\"aligncenter wp-image-50209 size-large\" src=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-1-APR-vs.-Interest-Rate-e1618602687249-1200x784.png\" alt=\"\" width=\"1200\" height=\"784\" srcset=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-1-APR-vs.-Interest-Rate-e1618602687249-1200x784.png 1200w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-1-APR-vs.-Interest-Rate-e1618602687249-600x392.png 600w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-1-APR-vs.-Interest-Rate-e1618602687249-768x502.png 768w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-1-APR-vs.-Interest-Rate-e1618602687249-300x196.png 300w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-1-APR-vs.-Interest-Rate-e1618602687249-150x98.png 150w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-1-APR-vs.-Interest-Rate-e1618602687249.png 1221w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/p>\n<p>The APR, meanwhile, can be found on page 3 under \u201cComparisons.<\/p>\n<p><a href=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-3-APR-vs.-Interest-Rate.png\"><img decoding=\"async\" class=\"aligncenter wp-image-50208 size-large\" src=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-3-APR-vs.-Interest-Rate-1200x652.png\" alt=\"\" width=\"1200\" height=\"652\" srcset=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-3-APR-vs.-Interest-Rate-1200x652.png 1200w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-3-APR-vs.-Interest-Rate-600x326.png 600w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-3-APR-vs.-Interest-Rate-768x418.png 768w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-3-APR-vs.-Interest-Rate-300x163.png 300w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-3-APR-vs.-Interest-Rate-150x82.png 150w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-pg.-3-APR-vs.-Interest-Rate.png 1223w\" sizes=\"(max-width: 1200px) 100vw, 1200px\" \/><\/a><\/p>\n<p>Once you\u2019ve gathered loan estimates from multiple lenders, compare the interest rates, APRs, and <a href=\"https:\/\/www.credible.com\/blog\/mortgages\/mortgage-closing-costs\/\">closing costs<\/a>.<\/p>\n<div class=\"basic-box\" style=\"border: 1px solid #E2E4E6;\"><div class=\"basic-box__inside\"><b>Tip: <\/b>After you\u2019ve compared costs, negotiate your loan terms by taking the best offer and asking the other lenders to match or beat the deal. Having a strong credit history may help lenders compete for your business.<\/div><\/div>\n<p><b><i>Learn More: <\/i><\/b><a href=\"https:\/\/www.credible.com\/blog\/mortgages\/how-to-get-the-best-mortgage-rate\/\"><b><i>How to Get the Best Mortgage Rates<\/i><\/b><\/a><\/p>\n<h3>What if my mortgage rate can change?<\/h3>\n<p>When looking at your interest rate on the first page of the loan estimate, check the right-hand column: \u201cCan this amount increase after closing?\u201d If it says \u201cYes,\u201d then you\u2019re taking out an adjustable-rate mortgage.<\/p>\n<p>With an ARM, your interest rate can change following an initial fixed period, which means the APR won\u2019t reflect the maximum interest rate of the mortgage.<\/p>\n<p>Your loan estimate should explain how your interest works in the \u201cProjected Payments\u201d table on page 1. Here\u2019s what your loan estimate might look like for an ARM:<\/p>\n<p><a href=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Projected-payments-APR-vs.-Interest-Rate.png\"><img decoding=\"async\" class=\"aligncenter wp-image-50207 size-full\" src=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Projected-payments-APR-vs.-Interest-Rate.png\" alt=\"\" width=\"1143\" height=\"852\" srcset=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Projected-payments-APR-vs.-Interest-Rate.png 1143w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Projected-payments-APR-vs.-Interest-Rate-600x447.png 600w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Projected-payments-APR-vs.-Interest-Rate-768x572.png 768w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Projected-payments-APR-vs.-Interest-Rate-300x224.png 300w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Projected-payments-APR-vs.-Interest-Rate-150x112.png 150w\" sizes=\"(max-width: 1143px) 100vw, 1143px\" \/><\/a><\/p>\n<p>There are also a couple of tables on page 2 \u2014 the Adjustable Payment (AP) table and the Adjustable Interest Rate (AIR) table \u2014 that provide additional details on your ARM. Here\u2019s an example of what these tables look like:<\/p>\n<p><a href=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Adjusted-payments-APR-vs.-Interest-Rate.png\"><img loading=\"lazy\" decoding=\"async\" class=\"aligncenter wp-image-50206 size-full\" src=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Adjusted-payments-APR-vs.-Interest-Rate.png\" alt=\"\" width=\"1139\" height=\"289\" srcset=\"https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Adjusted-payments-APR-vs.-Interest-Rate.png 1139w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Adjusted-payments-APR-vs.-Interest-Rate-600x152.png 600w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Adjusted-payments-APR-vs.-Interest-Rate-768x195.png 768w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Adjusted-payments-APR-vs.-Interest-Rate-300x76.png 300w, https:\/\/www.credible.com\/blog\/wp-content\/uploads\/2021\/04\/Loan-estimate-Adjusted-payments-APR-vs.-Interest-Rate-150x38.png 150w\" sizes=\"(max-width: 1139px) 100vw, 1139px\" \/><\/a><\/p>\n<p><b><i>Check Out: <\/i><\/b><a href=\"https:\/\/www.credible.com\/blog\/mortgages\/how-to-find-best-mortgage-lenders\/\"><b><i>How to Find the Best Mortgage Lender<\/i><\/b><\/a><br \/>\n<a name=\"mortgage-rate-apr-important\"><\/a><\/p>\n<h2>Low mortgage rate vs. low APR: What\u2019s more important?<\/h2>\n<p>When it comes to deciding between mortgage loans, it\u2019s a good idea to check both the interest rate and the APR. The interest rate tells you how much interest you\u2019ll pay every year, while the APR indicates the interest rate plus extra costs added by the lender.<\/p>\n<p>Because the APR gives you a broader picture of the costs you pay, it\u2019s the more important figure when calculating your loan costs.<\/p>\n<p><b>Check out this example:<\/b> You\u2019re looking to buy a home for $200,000 with a 30-year fixed rate and a 20% down payment. After getting two loan estimates, you compare the costs you pay on Loan A versus Loan B.<\/p>\n<p>Although Loan A has a higher interest rate, the APR is lower. You wind up paying less on Loan A over time:<\/p>\n\n<table id=\"tablepress-657\" class=\"tablepress tablepress-id-657 table table-border-top table-rounded table-no-img-margin table-capitalized-column-titles\">\n<tbody class=\"row-striping row-hover\">\n<tr class=\"row-1\">\n\t<td class=\"column-1\"><\/td><td class=\"column-2\"><strong>Loan A<\/strong><\/td><td class=\"column-3\"><strong>Loan B<\/strong><\/td>\n<\/tr>\n<tr class=\"row-2\">\n\t<td class=\"column-1\"><strong>Interest rate<\/strong><\/td><td class=\"column-2\">3.2%<\/td><td class=\"column-3\">3.1%<\/td>\n<\/tr>\n<tr class=\"row-3\">\n\t<td class=\"column-1\"><strong>Points and fees<\/strong><\/td><td class=\"column-2\">$2,500<\/td><td class=\"column-3\">$4,000<\/td>\n<\/tr>\n<tr class=\"row-4\">\n\t<td class=\"column-1\"><strong>APR<\/strong><\/td><td class=\"column-2\">3.3%<\/td><td class=\"column-3\">3.4%<\/td>\n<\/tr>\n<tr class=\"row-5\">\n\t<td class=\"column-1\"><strong>Monthly principal<br \/>\n<small>(principal and interest only)<\/small><\/strong><\/td><td class=\"column-2\">$691<\/td><td class=\"column-3\">$683<\/td>\n<\/tr>\n<tr class=\"row-6\">\n\t<td class=\"column-1\"><strong>All costs in the first five years<\/small><\/strong><\/td><td class=\"column-2\">$43,960<\/td><td class=\"column-3\">$44,980<\/td>\n<\/tr>\n<\/tbody>\n<\/table>\n\n","protected":false},"excerpt":{"rendered":"<p>When you\u2019re shopping for a home loan, you\u2019re bound to come across two numbers: the interest rate and the annual percentage rate (APR). These numbers help you determine how much you\u2019ll pay to borrow money&hellip; <a class=\"more \" href=\"https:\/\/www.credible.com\/blog\/mortgages\/apr-vs-interest-rate\/\">Continue reading<\/a><\/p>\n","protected":false},"author":105,"featured_media":50212,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"om_disable_all_campaigns":false,"inline_featured_image":false,"footnotes":""},"categories":[1463],"tags":[1534,1524,1528],"class_list":["post-50168","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-mortgages","tag-home-loans-101","tag-mortgage-purchase","tag-mortgage-rates-sidebar-no-table","apr-vs-interest-rate-understanding-the-difference","post_tag-home-loans-101","post_tag-mortgage-purchase","post_tag-mortgage-rates-sidebar-no-table"],"acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO plugin v28.0 - https:\/\/yoast.com\/product\/yoast-seo-wordpress\/ -->\n<title>APR vs. Interest Rate: Understanding the Difference - Credible<\/title>\n<meta name=\"description\" content=\"When shopping around for mortgage rates, make sure to compare the APR across several mortgage offers. 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