Key Takeaways
Your interest rate and APR are not the same. The interest rate represents the cost of borrowing, while APR incorporates the rate and certain loan-related costs.
A lower interest rate doesn’t always mean a cheaper mortgage. Upfront fees, discount points and other costs can change the overall cost of the loan.
APR works best when comparing similar mortgage offers. Comparing the APR of different loan types or terms may not give you an accurate picture of which option is better.
Your financial goals should guide your mortgage decision. How long you plan to keep the loan, how much cash you want to bring to closing, and your preferred monthly payment can all affect which mortgage makes the most sense.
When you’re comparing a mortgage, the mortgage APR and mortgage interest rate can both tell you something important about the loan—but they aren’t the same thing. Understanding APR vs. interest rate can help you see beyond the advertised rate, while knowing how to compare mortgage offers can help you determine which loan structure makes the most sense for your situation.
A lower interest rate may mean a lower monthly principal and interest payment, but it doesn’t necessarily mean you’re getting the least expensive mortgage. That’s because the interest rate is only one part of the overall cost of borrowing. That’s where APR comes in.
The annual percentage rate, or APR, gives you a broader look at the cost of a mortgage by factoring in the interest rate along with certain loan fees and charges. Looking at both numbers can give you a better understanding of what you’re actually paying for the loan.
Interest Rate vs. APR: What’s the Difference?
The easiest way to think about it is:
Your interest rate tells you the cost of borrowing the money. Your APR gives you a broader picture of the cost of the loan.
Your mortgage interest rate is the percentage your lender charges you to borrow money. It directly affects the amount of interest you pay over the life of the loan and plays a major role in determining your monthly principal and interest payment.
APR goes a step further. It incorporates the interest rate plus certain costs associated with getting the mortgage, such as some lender fees, discount points and, in applicable situations, mortgage insurance. That means a loan with a lower interest rate doesn’t automatically have a lower APR.
Imagine you receive two mortgage offers:
| Loan A | Loan B | |
| Interest Rate | 6.25% | 6.50% |
| APR | 6.45% | 6.70% |
| Upfront Costs | Higher | Lower |
Loan A has both the lower interest rate and lower APR in this example, making it the less expensive option based on the numbers shown.
However, mortgage comparisons are rarely that simple. The loan amount, term, points, lender fees and other costs all matter.
That’s why looking at the complete Loan Estimate is important rather than choosing a mortgage based on one number.
Why APR Matters When Comparing Mortgage Loans
When you’re shopping for a mortgage, it’s easy to focus on the advertised interest rate. A lender may promote a particularly attractive rate, but that rate could come with additional upfront costs. Another lender might offer a slightly higher rate with fewer fees.
APR can help put those offers into better context.
It provides a standardized way to look at certain borrowing costs over the life of the loan. While APR isn’t a perfect measure of what you will ultimately spend, it can be a useful comparison tool when you’re looking at similar loan products.
The key is to compare apples to apples.
For example, compare a 30-year fixed-rate mortgage with another 30-year fixed-rate mortgage. Don’t compare the APR on a 30-year fixed loan to the APR on a 5/1 ARM and assume the lower number automatically represents the better deal.
What Is Included in Mortgage APR?
APR generally includes the mortgage interest rate plus certain costs associated with obtaining the loan.
Depending on the loan, these can include:
- Origination charges: Fees associated with processing and originating the mortgage.
- Discount points: Upfront fees paid to reduce the mortgage interest rate.
- Mortgage insurance: Certain mortgage insurance costs may be reflected in the APR.
- Other lender-related charges: Some fees connected to obtaining the loan may also factor into the APR calculation.
Not every expense you pay when buying a home is included in the APR.
That distinction matters because your total cash needed to close can be higher than the costs reflected in the APR.
What Isn’t Included in Mortgage APR?
APR does not represent every expense associated with purchasing a home or closing a mortgage.
For example, certain third-party and prepaid expenses may not be included, such as:
- Home inspection costs
- Appraisal fees
- Attorney fees
- Property taxes
- Homeowners insurance
- Some title and recording expenses
- Property survey costs
This is one reason you shouldn’t use APR as the only number when comparing mortgage offers.
Instead, look at the entire Loan Estimate. Pay attention to the interest rate, APR, lender charges, estimated cash to close and projected monthly payment.
APR and Interest Rate Can Tell You Different Things
Think of your mortgage this way:
Interest rate: What you’re being charged to borrow the money.
APR: A broader measure that incorporates the interest rate and certain loan costs.
Monthly payment: What you are expected to pay each month for principal and interest, plus applicable taxes, insurance and other costs.
Cash to close: How much money you need to bring to closing.
All four numbers can be useful, but they answer different questions.
For example, you might find a mortgage with a very low interest rate that requires several thousand dollars in discount points. Another lender could offer a slightly higher rate with significantly lower upfront costs.
Depending on how long you plan to keep the mortgage, either option could make more financial sense.
Why a Lower APR Isn’t Always the “Best” Mortgage
APR is useful, but it isn’t designed to tell you which mortgage is best for your personal situation.
That’s because the right loan depends on more than the cost of borrowing.
Your plans for the home matter, too.
If you’re planning to stay in the property for decades, paying upfront points for a lower rate could potentially make sense. If you’re buying a starter home and expect to move within a few years, paying thousands of dollars upfront to reduce the rate may not provide the same benefit.
The same principle applies when comparing fixed-rate mortgages and adjustable-rate mortgages.
An ARM may have a lower initial rate and APR than a fixed-rate mortgage, but the rate can change after the initial fixed period.
The best mortgage isn’t necessarily the one with the lowest number on the page. It’s the one that fits your financial situation and your plans for the home.
How to Compare Mortgage Offers
Once you have multiple Loan Estimates, take a few minutes to compare them side by side.
1. Make Sure You’re Comparing the Same Loan
Start with the basics.
Make sure the loans have the same:
- Loan type
- Loan term
- Approximate loan amount
- Down payment
- Occupancy type
Comparing different loan structures can make one offer appear better when you’re actually comparing two very different products.
2. Compare the Interest Rates
The interest rate directly affects your principal and interest payment, so it remains an important part of the decision. Don’t ignore it just because APR provides additional information.
3. Compare the APR
Next, look at the APR to see how the rate and certain loan costs compare. A meaningful difference between the interest rate and APR can indicate that you’re paying additional costs to obtain that rate.
4. Look at the Upfront Costs
Review the lender fees and discount points. A lower rate isn’t necessarily worth paying thousands of dollars upfront. You’ll want to consider how long it could take to recover those costs through the lower monthly payment.
5. Look at the Total Cash Needed to Close
Your mortgage isn’t just about the rate. Review how much money you’ll need at closing, including your down payment, closing costs, prepaid expenses and applicable credits.
6. Consider How Long You’ll Keep the Loan
Your expected timeline can change the math significantly. Someone planning to own a home for 20 years may approach mortgage costs differently from someone who expects to move within five years.
Can You Lower Your Mortgage APR?
You may be able to improve the overall cost of your mortgage by strengthening your financial profile and comparing multiple loan options.
Some factors to consider include:
Improve your credit profile. A stronger credit profile can help you qualify for more competitive mortgage pricing.
Reduce existing debt. Lower debt can improve your debt-to-income ratio and may strengthen your overall mortgage application.
Consider your down payment. A larger down payment can reduce the amount you borrow and may affect your rate, mortgage insurance and overall loan costs.
Compare multiple lenders. Different lenders can offer different pricing and fee structures for the same type of mortgage.
Evaluate discount points carefully. Points can reduce your interest rate, but they require more money upfront. Calculate how long it would take for the monthly savings to make up for the initial cost.
Don’t Let One Number Make the Decision for You
Mortgage shopping can sometimes feel like comparing a dozen different numbers at once. The interest rate matters. APR matters. Closing costs matter. Your monthly payment matters. And your personal financial goals matter, too. Instead of choosing a mortgage based solely on the lowest advertised rate or APR, look at the complete loan structure.
At Loan Pronto, our mortgage professionals can help you compare your options and understand how the rate, APR, fees and loan structure work together. The goal isn’t simply to find a low number—it’s to find a mortgage that makes sense for your situation.
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