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Mortgage APR vs. interest rate

Profile picture of Jessica Render
by Jessica Render ConsumerAffairs Research Team
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Buying a home for the first time comes with a lot of excitement — and a lot to learn. When you begin looking at mortgage estimates, you’ll notice these terms: interest rate and APR. These may seem similar, but they have important differences to note. Understanding the distinction between interest rate and APR helps you compare options from lenders as you shop around for a loan.

What is an interest rate?

The interest rate is the amount it costs to borrow money from a lender. It's expressed as a percentage of the loan amount. As you pay off, or amortize, your loan over the loan term, part of your monthly payment will go toward paying interest on the loan.

Many factors affect your interest rate, including the economy, the financial markets, your credit score and your down payment amount. Interest rates can vary widely: In October 1981, the average 30-year fixed rate was over 18%; in October 2021 it dropped below 3%. As of the date of publication, mortgage interest rates remain near historic lows.

What is APR?

APR stands for annual percentage rate. The APR is a broader measure of the cost of borrowing; it includes interest and other fees. This is why your APR will be slightly higher than your interest rate. Sometimes APR is referred to as the “real” cost of your loan. Like an interest rate, APR is given as a percentage.

APR includes the interest rate and other fees associated with the loan, like broker fees, discount points and closing costs.

What fees are included in mortgage APR?

The APR on a mortgage includes:

  • Interest rate
  • Discount points
  • Mortgage broker fees
  • Loan origination fees
  • Mortgage insurance
  • Certain closing costs

How does APR affect your mortgage?

Most additional charges in the APR don’t change your monthly payments, which are mainly made up of principal, interest, taxes and insurance. That said, APR does indicate the total amount you spend to get a home loan, so it is a useful metric when comparing offers from different lenders. Keep in mind: If you’re refinancing, you may have the option to roll APR costs into your loan, which makes your monthly payments higher because you’ve increased your principal balance.

Can you negotiate APR on your mortgage?

There are certain APR fees you can ask your lender to reduce or waive. Depending on the lender, you may have success negotiating the following:

  • Discount points: Some borrowers can buy down their interest rate by purchasing “points.” One point costs 1% of your loan value and often reduces your interest rate by roughly 0.25%. Buying points means you pay more upfront, but it can save you money if you plan on keeping your loan long-term.
  • Closing costs: Some prices are fixed, but try asking for discounts on:
    • Origination fees: Lenders charge from 0.5% to 1% of the loan amount to process and fund the mortgage.
    • Application fees: Lenders may charge a fee for you to apply for a mortgage.
    • Seller concessions: The seller may agree to pay a portion of your closing costs.
    • Grant assistance: Depending on your loan, you may qualify for closing cost assistance through local or federal grant programs.

How to compare mortgages

When you’re comparing mortgages, it’s useful to look at both the interest rate and APR. When you apply for a mortgage, the lender is required to provide you with a three-page Loan Estimate that shows both the interest rate and the APR. As you research your options, bear in mind that the loan with the lower rate isn’t always the right option for you.

As an example, consider shopping for a $200,000 loan and receiving two quotes:

  • A loan with a 4.5% interest rate and 4.65% APR
  • A loan with a 4% interest rate (bought with two points) and 4.3% APR

At first glance the second option seems best, but it depends on your circumstances. Option two achieves the lower interest rate with more money upfront (in this case $4,000) and an increased APR. If you plan on keeping the loan for a long time, this may be your best choice. However, if you know you’ll only stay in the home for a few years, the first option may actually save you more once the upfront costs are factored in.

You’ll want to compare apples to apples, so look at an itemized list of closing costs for each quote. Ensure all quotes are using the same terms and estimates for insurance and taxes. Be especially careful when adjustable-rate loans are involved; the APR may not take into account the maximum interest rate on the loan.

How to get the best rate on a mortgage

Some factors that affect mortgage rates, like the federal funds rate set by the Federal Reserve, are beyond your control. But there are certain steps you can personally take to get the lowest possible rates from lenders.

  • Increase your credit score: Your credit score indicates your creditworthiness. Each lender is different, but on average you’ll need a minimum score of 620 to qualify for a mortgage. If you want the lowest rate, you’ll need a score of around 740 or higher.
  • Make a higher down payment: The higher your down payment, the more likely you’ll receive a lower rate. A larger down payment decreases your LTV (loan-to-value ratio), reducing the risk to the lender.
  • Reduce the loan term (length): 30-year loans are the most popular due to their lower monthly payments, but they won’t get you the lowest rate. You’ll have better luck achieving a low interest rate with a 15-year loan, but your monthly payments will be higher since you have less time to pay it back.
  • Explore variable vs. fixed mortgage rates: An ARM loan (adjustable-rate mortgage) offers a lower initial rate than a fixed-term loan and guarantees it for the first three to 10 years. After this period, the interest rate can change. If you know you’ll only stay in your home a few years, this can be a great option, but if you stay longer than expected, you could be stuck with a much higher rate than you started with.
  • Adjust your loan amount: The amount of your loan can affect your rate. If you take out a large loan, the lender is taking on more risk and may charge you a higher interest rate. On the other hand, small loans can result in a higher interest rate to help cover the processing costs.
  • Compare lenders and loan types: Each lender provides different types of loans and charges different fees. Find out what types of loans you qualify for, and look over your Loan Estimate to decide what loan makes the most financial sense.

Bottom line

Interest rate and APR (annual percentage rate) are two key parts of mortgage costs, but they aren’t quite the same. The interest rate is the annual cost to borrow money from the lender, while the APR is a broader measure that also includes other fees, like discount points, broker fees, origination fees and many closing costs. When you apply for a mortgage, the lender is required to disclose both. Researching APRs among lenders is a good way to compare the big-picture costs of home loans.

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Profile picture of Jessica Render
by Jessica Render ConsumerAffairs Research Team

As a member of the ConsumerAffairs research team, Jessica Render is dedicated to providing well-researched, valuable content designed to help consumers make informed purchase decisions they can feel confident making. She holds a degree in journalism from Oral Roberts University.