What is the difference between a mortgage interest rate and an APR?

What is the difference between a mortgage interest rate and an APR?

An annual percentage rate (APR) reflects the mortgage interest rate plus other charges.

There are many costs associated with taking out a mortgage. These include:

• The interest rate

• Points

• Fees

• Other charges

The difference between a mortgage interest rate and an APR lies in their scope of costs.

What is a mortgage interest rate?

The interest rate represents the annual cost of borrowing money, expressed as a percentage. It solely reflects the cost of borrowing and does not include fees or other charges associated with the loan.

What is a mortgage APR?

The APR, or annual percentage rate, provides a broader view of borrowing costs than the interest rate alone. It encompasses the interest rate, points, mortgage broker fees, and other charges required to secure the loan. Consequently, the APR is typically higher than the interest rate.

Tip: Exercise caution when comparing loan options to ensure you understand the differences in terms being offered:

• When comparing adjustable-rate mortgage (ARM) loans, note that the maximum interest rate is not reflected in the APR.

• Be mindful when comparing APRs between different types of loans, such as fixed-rate versus adjustable-rate mortgages.

• Be cautious when comparing the APR of loans like home equity lines of credit (HELOCs), which exclude specific fees from closed-end loans.

  

When selecting a loan, consider factors beyond the APR. Understanding how interest rates and APRs vary, especially for loans with adjustable rates, can help you make an informed decision.