Mortgage APR vs. interest rate: Understanding the key differences

When taking out a home loan, it’s important to understand how much interest you’ll pay over the life of your mortgage. This factor is often defined using terms like "interest rates" and "annual percentage rate”. But what do they mean, and how are they different?

This guide explains the differences between a regular mortgage interest rate and annual percentage rate (APR), including how they're calculated and how they affect your future mortgage payments.

What is a mortgage interest rate?

Your mortgage interest rate is the annual cost you pay to borrow money from a lender, expressed as a percentage.

The interest rate a lender charges depends on market factors and on your financial situation. Things such as your credit score and payment history, income, assets, debts and other considerations—like occupancy and property type—may affect the interest rate a lender will offer you.

Generally, the greater risk a borrower poses to lenders, the higher their interest rate. Different lenders might also offer different rates, so it's important to shop around before choosing a bank or a broker.

What is a mortgage annual percentage rate (APR)?

Your annual percentage rate, or APR, represents the total cost of a loan. Like your interest rate, the APR is expressed as an annual rate and provides you with a more accurate picture of the cost of a loan over its lifetime. Therefore, APR is often higher than the interest rate on the mortgage.

Mortgage APR includes the interest rate, as well as:

• Origination fees and lender fees: These are the fees charged by a lender to process your mortgage application.
• Mortgage broker fees: These are the fees charged by a mortgage broker for their services.
• Mortgage discount points: You can get a deduction in your loan’s interest rate with an upfront payment. This may be listed in your APR.
• Private mortgage insurance: This is an additional fee you’ll pay if you put less than 20% down. Your APR may also include the cost of PMI.

If you choose to add other closing costs to your mortgage balance, this may affect your APR.

Because APR is determined by the lender, it’s harder to predict what your final APR may be, but the APR could add a percentage point or more to the total cost of borrowing. That’s why the Truth in Lending Act, requires lenders to disclose a loan's APR, as well as its interest rate.

Interest rate vs. APR: Which is more important?

Potential borrowers should use both the loan’s interest rate and APR to comparison shop between lenders and determine whether a loan is truly affordable. This can also give you insight into how a lender structures their loan.

Let’s say you’re looking at two competing loan offers:

• Lender A: Offers a 5.5% interest rate with a 7% APR
• Lender B: Offers a 6.5% interest rate with a 7% APR

If both loans have the same APR, they’ll cost you the same amount over the life of the loan. The difference is that lender A seems to be charging more in fees and other expenses. This is why it may be informative to see what each lender is charging above the interest rate.

For example, lender A may charge more above the interest rate because they include more loan expenses or closing costs when they calculate your APR. If this is the case, you may want to see what your APR will be if lender B includes those same expenses into their APR.

If both lenders include the same expenses in their APR, it may mean that lender A charges more for the same services. In this case, you may be able to negotiate lower fees and expenses with lender A or secure a lower interest rate with lender B.

You can find the interest rate in the loan terms section and the APR in the comparisons section of your Loan Estimate.

How to get a lower mortgage interest rate

You can take a number of steps to make sure you're getting a relatively low rate on your mortgage:

Work to improve your credit score

Lenders use your credit score to determine whether to offer you a loan, as well as to calculate your interest rate. So by improving your credit score, you could qualify for better interest rates and terms when applying for a new mortgage, or refinancing an existing one.

Show a steady record of employment

Lenders like to see that a potential borrower has at least two years of steady income. That means you'll need to show your W-2s and pay stubs when you apply for a loan.  If you have an uneven employment history, are self-employed or have multiple income sources, you may still qualify, but you’ll need to provide bank statements and other forms as proof of income. These documents can show your lender you have the means to make your monthly loan payments, which in turn, can help you secure a lower interest rate.

Save up for a larger down payment

Putting at least 20% down can help lower your interest rate, since lenders tend to offer lower rates to borrowers who can afford a larger down payment. It could also help you avoid private mortgage insurance (PMI), which typically equals 1% of the original loan amount each year.

Explore different loan options

Some adjustable-rate mortgages may offer a lower interest rate for the first five to 10 years of your repayment period. Your interest may go up afterward, but if you sell your home or refinance before the introductory period ends, you can enjoy a lower interest rate than you might pay otherwise.

Lock in your interest rate

Even after your offer on a home has been accepted, closing timelines can vary significantly. In that time, interest rates could change. You may have the option to ask your lender to lock in your rate after you've secured a loan to avoid your interest rate rising before you close.

Buy mortgage discount points

If you’re able to afford them, you can lower your interest rate by buying mortgage basis points or discount points. This requires an upfront payment equal to 1% of your loan amount, but it can lower your interest rate by 0.25% for every point purchased. This option can save you money on long-term loans.

How to get a better APR on your mortgage

Beyond the interest rate offered, there may be ways to get a lower APR from your mortgage lender. Consider the following tips to help you save even more.

Shop around for a lender

Make sure you've explored all your options. Some lenders may charge less in loan fees, which can lower your APR. In addition to talking to your local bank or credit union, explore online options and mortgage brokers. And don’t forget to compare the Loan Estimates you receive from different lenders to determine which one is best for you.

Negotiate your terms

If presented with a competing offer, certain lenders may be willing to lower some of their fees to provide you with a lower APR. Keep in mind that lenders will always need to weigh risk, so the stronger your loan application, the more likely they are to negotiate.

In summary

You have a number of factors to consider when deciding whether to buy a home, how much you can afford and how to get a loan. Understanding the difference between a regular mortgage interest rate and an the APR will help you take the next step in your homebuying journey while helping you save money along the way.

Difference between APR and interest rate: FAQs

Why is my APR higher than my interest rate?

Because your APR incorporates all of your borrowing costs beyond the interest you agree to pay on the loan, it tends to be higher. It also provides you with a more accurate estimate of what you’ll pay over the life of your loan.

Should I go by APR or interest rate?

When shopping for a mortgage, it may be more helpful to go by APR because it provides you with a more accurate point of comparison for the long-term cost of a loan.

How does APR affect monthly payments?

Because it reflects your total cost to borrow, your APR will determine how much you pay in interest each month. A higher APR usually means a higher monthly mortgage payment, even when the amount borrowed and the length of the loan term are the same compared to a loan with a lower APR.