APR vs. interest rate: What's the difference?

When buying a home, it’s important to compare mortgage APR vs. interest rate. Both can affect your monthly mortgage payment and the total cost of buying a home. However, mortgage interest rates and APRs are not the same thing. The annual percentage rate (APR) on a mortgage is usually higher than the interest rate because it includes the interest rate and other fees associated with borrowing money.

The APR and interest rate are key in determining which mortgage lender you choose — and whether you can afford the home loan.
 

What is an interest rate?

Mortgage loans come with an interest rate, represented as a percentage of the loan. It is essentially the cost of borrowing money. The interest rate does not include other fees or charges that come with the loan.

When it comes to home loans, there are two main types of interest rates:

• Fixed interest rate: A fixed-rate mortgage loan will stay the same throughout the life of the loan. This makes it easier to calculate your monthly payment since the rate doesn’t change.
• Adjustable interest rate: An adjustable interest rate can rise or fall over time. This can make it harder to predict your monthly payments. Some adjustable-rate mortgages (ARMs) have a lower initial interest rate than fixed-rate loans. This initial period usually only lasts for a few months or years, however.

Here’s an example of how much interest you’d pay on a $400,000 mortgage with a 6% fixed interest rate (excluding property taxes and other fees):

What is an annual percentage rate?

The APR can give you a better idea of the overall cost of your mortgage. This is because it includes the interest rate and other lender fees, such as:

• Mortgage broker fees
• Lender points
• Other lender charges (e.g., origination fees)

A mortgage APR is usually higher than or equal to the interest rate. It’s also expressed as a percentage of the loan.

When you apply for a home loan, you’ll receive a loan estimate from your lender. You can usually find the loan's APR under “Comparisons.” You can find the interest rate under “loan terms.”

The difference between an APR and interest rate

Knowing the difference between mortgage APR vs. interest rate is key to understanding the cost of the loan. Both reflect the cost of borrowing money. They're also both represented as percentages.

However, the APR is almost always higher than the interest rate since it includes the interest rate and other charges. For this reason, the APR can give you a clearer idea of the true cost of a loan.

Some mortgage lenders have minimal upfront fees. In this case, the APR and interest rate might not be that different.

How are interest rates and APR determined?

 Lenders set their mortgage interest rates based on several factors, such as:

• Current economic conditions: This may include supply and demand or the housing market in your area.
• Federal Reserve policies: The Fed doesn't set interest rates, but it does determine the federal funds rate. The higher the federal funds rate, the higher your interest rate could be.
• Inflation: Interest rates may increase or decrease based on the current rate of inflation.

Other factors that might affect your interest rate include your:

• Credit score: A higher credit score could result in a lower interest rate. 
• Down payment amount: The larger your down payment, the lower your interest rate tends to be.
• Loan amount: A more expensive home might come with a higher rate. 
• Loan term: A longer-term loan usually comes with lower monthly payments, but you're likely going to have to pay more in total interest. Shorter repayment terms, such as 15 years, usually have lower interest rates. 
• Home loan type: Mortgage rates can vary widely based on the loan type. Conventional loans are backed by private lenders, while FHA, USDA, and VA loans are insured by government agencies. 
• Property location: Lenders in different states may offer different interest rates.
• Interest rate type: Variable-rate loans may come with a lower starting interest rate than loans with a fixed rate, but this rate can change over time.

A mortgage APR is calculated based on the interest rate, lender fees, and discount points. Certain lenders charge additional fees — like mortgage broker fees, origination fees, or closing fees — when lending money. This can increase your overall APR.

If you use discount points or lender credits, this could also influence your APR and interest rate. You can buy points to reduce your interest rate by paying more money at closing, or you can purchase lender credits to reduce your closing costs and increase your interest rate.

How to compare mortgage offers

Homebuying can be exciting, but it can also be expensive. And since not all lenders are created equal, it’s important to compare your loan options carefully.

Start by applying for home loans with several lenders. Typically, when you apply for a loan, it will show up as a hard inquiry on your credit report and affect your credit score. But if you apply with multiple lenders within a 45-day period, your applications will only count as one hard inquiry.

Once you apply for a loan, you should receive a loan estimate from each lender. This form contains information about your loan, including:

• Mortgage APR
• Interest rate
• Estimated closing costs
• Monthly payment amount (and potential changes)
• Prepayment penalties
• Other key details about the loan

When making your final decision, review loan estimates from different lenders to see which one has the best offer, and don’t forget to compare the APR vs. interest rate too.

Low interest rate vs. low APR: Which is better?

Getting a home loan with the lowest interest rate possible might be tempting, but there are times when having a lower APR is better. It depends on your situation and the length of your loan.

A lower interest rate generally means smaller monthly payments, but if you have a longer repayment term, you could still end up paying more in total interest over time. 

A low APR could also mean smaller monthly payments, depending on the loan term. If you get a shorter term, your monthly payments could be higher but you’ll save money on interest. A low APR could also translate to more savings on the total loan cost.

Consider your financial situation and goals when making your decision. 

APR vs. interest rate FAQ

What is a good APR on a 30-year mortgage?

Determining what’s a “good” APR on a 30-year mortgage is relative. Compare your quoted APR to the current average interest rate on a 30-year fixed-rate mortgage. Anything equal to or lower than the average rate could be considered good.

However, APRs fluctuate based on economic and personal factors. You might get a better overall mortgage rate if you have good credit, a larger down payment, and a smaller loan. You might also get a better rate if you apply for a loan when rates are down.

Will mortgage rates go down in 2024?

While many analysts predict interest rates will sink to around 6% by the end of the year, inflation has remained higher than the Federal Reserve’s goal of 2%. The Federal Reserve adjusted its outlook in July, holding the federal funds rate steady but indicating an interest rate cut could be discussed in September. Until then, experts predict mortgage rates are likely to stay around 7%, though they also anticipate four rate cuts in 2025 if inflation cools.

Can you negotiate APR on a mortgage?

You might be able to negotiate with your lender for a lower APR or interest rate. One way to do this is to ask the lender to reduce or waive some of its fees, such as origination or underwriting fees. You could also purchase discount points at closing to get a lower rate on your home loan. You may also get a lower rate by making a down payment of at least 20% or opting for a shorter repayment term, such as 15 years instead of 30.

Are closing costs included in APR?

A mortgage APR generally includes the interest rate and various other charges, such as certain closing costs, origination fees, and discount points. Speak with your lender about what its APR includes when applying for a loan. Make sure you know how the APR is calculated when you compare loan offers from different lenders.