What's the difference between mortgage APR vs. interest rate?
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- Your mortgage annual percentage rate (APR) is different than your mortgage interest rate.
- The APR gives you a more accurate sense of what you'll pay because it includes fees and other charges.
- A mortgage lender may charge a higher interest rate than another lender and yet offer a better APR.
Mortgage borrowers pay a lot of attention to what mortgage rates they're offered, and for good reason — the better your rate, the less you'll pay each month and over the life of your loan. But as you shop around, you'll notice that mortgage lenders advertise two different rates: an interest rate, and an APR. What does this additional rate mean for your mortgage?
Mortgage APR gives you a holistic view of how much the mortgage will cost overall, over the entire loan term. Let's take a closer look at the difference between mortgage APR vs. interest rate.
Mortgage APR vs. interest rate
When looking at your mortgage documents, you'll see two percentages pop up: the interest rate and annual percentage rate (APR). These are two distinct percentages, and it's important to know the difference.
Your interest rate is the fee the lender charges you for borrowing money, expressed as a percentage such as 3.75%. Along with your mortgage principal, you'll pay interest each month.
The APR is the interest rate plus the costs of things like discount points and fees. This number is higher than the interest rate and is a more accurate representation of what you'll actually pay on your mortgage annually.
Why is it important to understand the difference between the interest rate and APR? When you're shopping around for mortgage lenders, you may find that one charges a lower interest rate, so you think that company is the obvious choice. But you might actually find out the APR is higher than what you can get with another lender because it charges hefty fees. In reality, it might not be the best deal.
What's included in an APR?
Here are the costs you can expect to be represented in your APR:
- Interest rate
- Discount points: You can pay a fee at closing for a lower interest rate on your mortgage. One discount point usually costs 1% of your mortgage, and it reduces your rate by 0.25%. So if your rate on a $200,000 mortgage is 3.5% and you pay $4,000 for two discount points, your new interest rate is 3%.
- Mortgage insurance
- Origination fee
- Mortgage fee
- Underwriting fee
- Loan processing fee
- Escrow fee
- Legal fees
Although the APR gives you a better idea of what you'll pay on your mortgage than the interest rate, a lender doesn't include all fees in your APR. Here are some fees that usually aren't reflected in the APR:
- Title examination and insurance fees
- Notary fees
- Attorney fees
- Credit report fees
- Inspection fees
- Appraisal fees
- Recording fee
- Property survey fees
Ask your lender for an itemized list of fees so you can know what you're paying, both toward the APR and toward other fees.
Mortgage APR example
Let's look at two hypothetical 30-year fixed-rate mortgages for $200,000 that charge different interest rates and fees.
Mortgage A charges a 3.5% rate. Mortgage B charges a 3% rate, but you pay $2,000 for a discount point, lowering the rate to 3%.
Mortgage A comes with a higher rate but lower fees. Mortgage B comes with a lower rate but higher fees. Which one has the better APR?
| Mortgage A | Mortgage B | |
| Interest rate | 3.5% | 3% |
| Origination fee | $1,000 | $2,000 |
| Other closing costs | $4,000 | $10,000 |
| Discount points | None | $2,000 |
| APR | 3.70% | 3.54% |
Even though Mortgage B has higher fees, its rate is low enough to make it a better deal than Mortgage A.
This doesn't mean every mortgage with a lower rate will have a better APR than one with a higher rate. It depends on how drastic the differences in interest rates and fees are from one lender to the next.
A lender is legally required to tell you the APR of your mortgage, not just the interest rate. If you're still searching for the right lender, request a list of fees from each one to get a good idea of which one will offer the best APR.