Interest Rate vs. APR: What’s the Difference?

If you’re planning on buying a home, you’re most likely going to take out a mortgage. If you’ve never taken out a home loan before, then you might get a little overwhelmed, if not a bit confused, about some of the terms surrounding a mortgage. For example, many borrowers don’t realize that the mortgage interest rate and the mortgage APR are not the same thing. The following is a breakdown of the difference between mortgage interest rate and APR:

What is the Mortgage Interest Rate?

The mortgage interest rate is essentially the interest that a lender charges on the loan. It’s the cost of borrowing money from them. It’s charged on the principal of the loan. For example, if the interest rate is 4 percent and the loan is for $200,000, then the interest on your $200,000 loan will be 4 percent.

However, there are different types of interest rates. A fixed rate is an interest rate that will not change no matter what. Even if the market rate changes, your fixed rate won’t. Variable rates are often a little lower when you first take out the mortgage. However, this is because they can change based on the market. There’s a lot to consider when choosing between the two. A fixed rate can result in paying more than the market rate, but if the market rate goes up significantly, it can also mean that you’ll end up paying less.

It’s also worth noting that in the end, your interest rate will be heavily dependent on your credit score. The better your credit score is, the lower your interest rate is likely to be. The lower your credit score, the higher it will be.

What is the Mortgage APR?

A mortgage APR (annual percentage rate) is different than a mortgage interest rate, even though a mortgage rate is also expressed as an annual rate. An APR is broader than the mortgage interest rate. Not only does it include the mortgage interest rate, it also includes other costs, such as discount points, broker fees, and some closing costs (that are expressed as a percentage).

Which Should You Pay Attention To?

Both of these numbers are actually quite helpful. The mortgage interest rate will give you an idea of what your monthly payments will be. This is because the payment you have to make on your mortgage every month is based on the principal of the loan along with the interest rate on the loan.

On the other hand, the APR will provide you with a better idea of how much the loan will cost you overall. Lenders are required to disclose what the APR is; however, it’s worth noting that they are not legally required to disclose everything that’s included in the APR, such as the appraisal fee, the inspection fee, and the credit reporting fee. You’ll want to ask your lender for a thorough breakdown of the APR to get a better understanding of how much your loan will cost.

The Difference Between Mortgage Interest Rate and APR

Essentially, the mortgage interest rate helps you figure out what your monthly costs will be, whereas the APR will give you a better idea of how much your loan will cost you overall. As you explore your options, you’ll want to compare the mortgage interest rate and the APR of different lenders in order to identify which loan is the best home mortgage for you.

Buying a home is a very rewarding experience. We help people just like you finance their dream homes. If you’re ready to apply for a loan, or you have more questions about taking out a mortgage to buy a house, contact us at Equibox Mortgage.

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