APR vs Interest Rate: Why Mortgage Quotes Show Two Different Numbers
What is the difference between an interest rate and APR on a mortgage? The interest rate reflects the cost of borrowing the loan principal, while the annual percentage rate, or APR, includes the interest rate plus certain lender related fees associated with the loan. Because APR includes these additional costs, it is typically higher than the interest rate. Understanding the difference helps homebuyers evaluate mortgage offers more accurately.
Why Mortgage Quotes Show Two Numbers
If you have looked at mortgage advertisements recently, you may have seen something like this:
Rates as low as 3.99% (6.215% APR)
At first glance, this can feel confusing. Why are there two numbers?
The reason is that they represent two different ways of measuring the cost of the same loan.
One reflects the interest charged on the loan balance. The other reflects a broader estimate of the loan’s overall cost once certain lender fees are included.
Understanding this difference helps buyers compare loan offers more accurately.
What the Interest Rate Means
The interest rate, sometimes called the note rate, is the percentage used to calculate the interest portion of your mortgage payment.
It reflects the cost of borrowing the loan principal only. The interest rate does not include lender fees or other charges related to obtaining the loan.
Because it excludes those costs, the interest rate is usually the number emphasized in advertisements.
According to the Consumer Financial Protection Bureau, the interest rate determines how much interest you pay on the amount you borrow each year.
Source:
Consumer Financial Protection Bureau
“What’s the difference between a mortgage rate and an APR?”
What APR Means
APR stands for Annual Percentage Rate.
APR is designed to give borrowers a broader picture of the cost of borrowing by including certain loan-related fees along with the interest rate.
APR typically includes:
• the interest rate
• mortgage discount points
• loan origination fees
• certain lender-related charges
These costs are combined and expressed as a yearly percentage to help borrowers compare loan offers more accurately.
Because APR includes more than just the interest rate, it is usually higher than the interest rate.
Source:
Consumer Financial Protection Bureau
“Learn about loan costs.”
Why the APR Can Be Higher Than the Interest Rate
When you see something like:
3.99% interest rate (6.215% APR)
it usually means the loan includes additional upfront costs, such as discount points or lender fees.
A useful rule of thumb:
The larger the difference between the interest rate and APR, the more loan costs may be included in the loan structure.
However, the exact difference can vary depending on factors such as loan size, loan term, and the fees associated with the specific mortgage program.
Why APR Matters When Comparing Lenders
Many buyers compare mortgage offers based only on the advertised interest rate.
That can be misleading.
Two lenders may advertise the same interest rate but charge very different fees. Those differences will often show up in the APR.
Comparing APR to APR, assuming the same loan type and term, gives borrowers a more accurate way to compare the total cost of different loan options.
Source:
Bankrate Mortgage Guide
“APR vs. interest rate: What’s the difference?”
Frequently Asked Questions
Why Is the APR Higher Than the Interest Rate?
APR is usually higher because it includes the interest rate plus certain loan-related fees.
While the interest rate reflects the cost of borrowing the loan balance, the APR incorporates additional costs associated with obtaining the loan. These costs are converted into a yearly percentage to make loan comparisons easier.
For example, a mortgage with a 3.99% interest rate and a 6.215% APR likely includes lender fees or discount points that increase the overall cost of borrowing.
Reviewing the Loan Estimate provided by a lender will show exactly which fees contribute to the APR.
Should Buyers Focus on the Interest Rate or APR?
Both numbers matter.
The interest rate determines the interest portion of the monthly mortgage payment. APR reflects a broader estimate of the total loan cost over time.
When comparing lenders offering the same loan type and term, comparing APR to APR often provides a clearer picture of which loan may be less expensive overall.
Borrowers should also review the full Loan Estimate and speak with a qualified mortgage professional before making financing decisions.
The Bottom Line
Mortgage advertisements often highlight the lowest possible interest rate.
APR provides a broader view of the total cost of the loan once certain lender fees are included. Understanding the difference between these two numbers helps buyers evaluate loan offers more confidently and avoid focusing only on the headline rate.
Disclaimer: Glasheen Real Estate is not a lender or financial advisor. This content is for informational purposes only. Buyers should consult licensed mortgage professionals when evaluating loan options.
Presented by Kristen Glasheen, REALTOR®, Glasheen Real Estate, Long Realty Company.
Contact Kristen:
☎️ Call: 520.345.9360
📱 Text: 520.345.9360
📧 Email: kristen@glasheenrealestate.com