interest rate
The interest rate is the cost you pay each year to borrow the money, expressed as a percentage rate. It does not reflect fees or any other charges you may have to pay for the loan. Your monthly mortgage payment is based on this interest rate, along with the loan amount and the loan term.
The interest rate appears on page 1 of your Loan Estimate under 'Loan Terms.' It's the number that directly determines your monthly principal and interest payment.
- Does not include fees or other charges
- Determines your monthly payment
Sources: Consumer Financial Protection Bureau, Rocket Mortgage
Definition of APR and What It Includes
The annual percentage rate (APR) is a broader measure of the cost of borrowing money than the interest rate. It reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan. Because it includes these additional costs, the APR is usually higher than the interest rate.
The APR appears on page 3 of your Loan Estimate under 'Comparisons.' It's designed to help you compare the total cost of different loan offers, as it spreads these upfront costs over the loan term.
- Includes interest rate, points, mortgage broker fees, and other charges
- Usually higher than the interest rate
- Helps you compare the total cost of loans with different rates and fees
Sources: Consumer Financial Protection Bureau, Rocket Mortgage
Fees Included in APR vs Fees Not Included
Lenders include certain fees in the APR calculation to give you a more complete picture of the loan's cost. These typically include origination fees, discount points, underwriting fees, document preparation fees, administrative fees, application fees, and prepaid interest.
On the other hand, some fees are generally not included in the APR. These include appraisal fees, survey fees, title insurance, and prepaid items like taxes and insurance. Knowing which fees are included helps you understand why APRs can differ between lenders.
- Typically included: origination fees, discount points, underwriting fees, document prep fees, admin fees, application fees, prepaid interest
- Typically not included: appraisal, survey, title insurance, prepaid taxes and insurance
Sources: AmeriSave, Bankrate, Calculator.net
Example: Comparing Two Mortgage Offers
In this case, comparing APRs reveals that Offer B is actually the less expensive option overall, despite its higher interest rate and monthly payment.
- Offer B has a lower total cost when fees are included, as reflected in its lower APR.
Sources: Rocket Mortgage
Why APR Isn't Always the Best Comparison Tool
The APR calculation assumes you'll keep the loan for its full term. If you pay off the loan early, the APR may underestimate the impact of upfront fees, making a loan with lower upfront costs but a higher rate look worse than it actually is.
Because the APR is a standardized disclosure, compare APRs for the same loan type and review the itemized fees on each Loan Estimate to ensure you are making a fair comparison.
- APR assumes the loan is held for the full term.
- Early payoff can make APR less useful.
- Compare fixed-rate to fixed-rate and adjustable-rate to adjustable-rate.
- Review itemized fees on each Loan Estimate.
Sources: Rocket Mortgage, Calculator.net
How to Use Both Numbers in Your Decision
Use the interest rate to estimate your monthly payment. Use the APR to compare the total cost of different loan offers. By looking at both, you can balance your monthly budget with the long-term cost of the loan.
If you plan to stay in your home for a long time, the APR is a good indicator of which loan costs less over the full term. If you might refinance or sell in a few years, focus more on the interest rate and upfront fees, since the APR's full-term assumption may not match your situation.
- Interest rate for monthly payment.
- APR for comparing overall loan costs.
- Consider how long you plan to keep the loan.
- Verify that fees are itemized on the Loan Estimate.
Sources: Consumer Financial Protection Bureau, Rocket Mortgage, Calculator.net
APR and Interest Rate at a Glance
The table below summarizes the key differences between APR and interest rate to help you make an informed comparison.
| Aspect | Interest Rate | APR |
|---|---|---|
| Definition | Yearly cost of borrowing, expressed as a percentage | Broader measure including rate plus certain fees |
| Includes | Only the interest charge | Interest rate, points, broker fees, and certain closing costs |
| Typical relation | Lower than APR | Usually higher than interest rate |
| Used for | Calculating monthly payment | Comparing total loan costs |
| Found on Loan Estimate | Page 1, Loan Terms | Page 3, Comparisons |
| Limitations | Doesn't reflect total cost | Assumes loan held for full term |
Sources: Consumer Financial Protection Bureau, Rocket Mortgage
Frequently asked questions
Is a lower APR always better?
Not necessarily. A lower APR generally means a lower total cost of borrowing, but the APR assumes you keep the loan for its full term. If you sell or refinance before the term ends, you might pay more in fees upfront despite the lower APR. Consider your plans and compare APRs for similar loan types.
Sources: Rocket Mortgage, Calculator.netWhich is more important: APR or interest rate?
Both matter. The interest rate determines your monthly payment, while the APR reflects the total cost, including fees. When comparing offers, look at the interest rate to gauge monthly affordability and the APR to assess overall cost. The importance of each depends on how long you plan to keep the loan.
Sources: Consumer Financial Protection Bureau, Rocket MortgageDo all lenders calculate APR the same way?
Lenders must disclose APR under the Truth in Lending Act. Compare APRs for similar loan types and check the itemized Loan Estimate to confirm which fees are included.
Sources: Rocket Mortgage, PNCCan APR change after closing?
The APR is a disclosure that reflects the costs at the time of closing. The final loan documents control the terms of your loan, but the APR you were quoted is a snapshot of those costs at that time.
Sources: Consumer Financial Protection BureauWhy does APR differ from the advertised rate?
The advertised interest rate often excludes fees and other costs. The APR includes those additional charges, making it higher in most cases. When comparing offers, the APR gives you a more complete picture of what you'll actually pay over the loan's term.
Sources: Consumer Financial Protection BureauSources
- What is the difference between a mortgage interest rate and an APR? — Consumer Financial Protection Bureau
- What is the difference between a mortgage interest rate and an APR? — Consumer Financial Protection Bureau
- APR vs. interest rate: What's the difference? — Rocket Mortgage
- Mortgage Interest Rate vs. APR Explained — AmeriSave
- APR vs. Interest Rate: What's The Difference? — Bankrate
- APR Calculator — Calculator.net
- Mortgage APR Vs. Interest Rate: What's the Difference? — PNC