APR vs. interest rate: It pays to know the difference

First-time Homebuyer

Learning how each of these key numbers affects your home purchase can help you feel more confident in your decision.

Shopping for the best mortgage rates? There are two types of rates to consider—interest rate and annual percentage rate (APR).

Here are five answers to common questions about what these rates mean for your home search and your budget.

1. What does each rate mean?

The interest rate is the rate of interest you pay annually on the principal loan amount—so a 4% interest rate on a $100,000 mortgage loan equals $4,000 interest per year. The interest rate can change after an initial fixed period if you take out an adjustable-rate mortgage (ARM).

An APR is the rate of interest you pay over the entire life of the loan, including fees you pay upfront to get the loan. These upfront fees may include:

  • Discount points
  • Loan origination fees
  • Loan processing fees
  • Underwriting fees
  • Appraisal review

The APR is often higher than the interest rate. The APR is unique to each loan and is not used to determine your monthly payment.

2. How can I compare rates?

You can't really compare an interest rate to an APR because they mean different things, but you can compare the same kinds of rates. That's especially important for comparing the APR on adjustable-rate mortgages. Even then, those are based on assumptions about rates, so it won't accurately reflect the maximum interest rate your loan could reach.

3. How do the rates affect my bottom line?

The lower your interest rate, the less money you'll pay each month. The lower the APR, the less you'll pay at closing and over the entire life of the loan.

If your goal is to pay the least amount of money each month, you'll want to focus on the interest rate. But if you want lower closing costs and the lowest overall price over the entire term of the loan, you'll want to consider APR carefully.

4. Does it matter how long I plan to own the home?

It might. If you plan to stay a while, a loan option with a low APR might make the most sense, because you'll pay less over the life of the loan. But if you're only going to stay for a few years, you may want to pay less in upfront fees, even if the interest rate is higher. It can take several years for the long-term rate savings of paying more upfront fees to work in your favor. Our mortgage team can help you figure out what makes the most sense for you.

5. What about mortgage insurance?

If you don't put 20% down on your house, you'll need to pay private mortgage insurance (PMI) as part of your monthly payment. Don't compare loan rates if one includes mortgage insurance and one doesn't. Insurance is one of the costs factored into APR, so the APR will naturally be higher on a loan with mortgage insurance.

Each situation is unique.

What matters most for your situation? Do you want to pay less at closing and over the life of the loan? Or is a lower monthly payment more important? We can help guide you through every step of the homebuying process.