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

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They might be used interchangeably, but an APR and an interest rate aren’t one and the same. The annual percentage rate represents your total cost of getting a mortgage. The interest rate represents the cost you pay over time to buy that loan.

Let’s take a look at the difference between your APR and interest rate, and how they affect the true cost of a mortgage.

We’ll cover:

What’s an annual percentage rate?

An annual percentage rate on a mortgage is a broad measure of the cost to borrow that mortgage. It includes the mortgage interest rate as well as the other costs of borrowing, such as:

  • Loan origination fees
  • Discount points
  • Mortgage insurance
  • Other closing costs

An APR is expressed as a percentage and is usually higher than an interest rate, as it factors in other charges related to getting a mortgage. APRs were created to make it easier for consumers to compare loans with different rates and costs. When you apply for a mortgage and receive a Loan Estimate, you can find your APR on Page 3 of the document.

How APRs differ from interest rates

While an annual percentage rate accounts for the various costs of getting a mortgage, an interest rate is simply the amount a lender charges you to finance the purchase of your home. It’s expressed as a percentage of your loan amount but it doesn’t include any of the fees and points that are part of an APR calculation.

How loans with the same interest rate can have different APRs

Paying attention to the interest rate when you’re shopping for a mortgage is a useful way to compare offers. After all,  it’s what lenders use to calculate your estimated monthly payment for a given loan amount and term.

Still, mortgage lenders are required by law to disclose the annual percentage rate in a loan transaction. This is because it measures the full cost of credit, something that interest rates don’t take into account. If you’re comparing two mortgages that have the same interest rate and appear to be similar mortgage products, be sure you also review each loan’s APR.

Consider the following example of two different 30-year fixed-rate mortgages for a $250,000 home with a 20% down payment:

Same Interest Rate, Different APR
Loan A Loan B
Loan amount $200,000 $200,000
Interest rate 4.50% 4.50%
Points 1 2
Fees $1,500 $700
Adjusted balance

(Loan amount + Fees and Points)

$203,500 $204,700
Monthly payment

(Principal and Interest)

$1,031.10 $1,037.18


Along with origination fees, both loans have discount points, which is money borrowers pay to get a lower mortgage rate. One discount point is equal to 1% of the loan amount, so each point in the example above would cost $2,000.

On first glance, it appears Loan A is a slightly better deal since there’s a $1,200 difference in points and fees. Additionally, the principal and interest portion of the monthly mortgage payment (based on the adjusted balance) is about $6 cheaper than Loan B. Still, we’ll need to calculate each loan’s annual percentage rate for further comparison.

Calculating APRs

You’ll need to use a mortgage APR calculator to calculate the APR, as there are several variables to account for that are a bit more complicated than a basic calculator can handle. There are two ways to calculate APR: the actuarial method, which most lenders use, and the U.S. rule method. APR calculation examples using the actuarial method can be found on the Consumer Financial Protection Bureau’s website.

For the example above, we used an online mortgage APR calculator and input information based on the original loan amount of $200,000.

APRs on Two Loans With Same Interest Rates
Loan A Loan B
Annual Percentage Rate 4.651% 4.704%

The APR on Loan A is lower, making it indeed the better mortgage deal.

Watch out for APRs on ARMs

As we know, a 15- or 30-year fixed-rate mortgage isn’t everyone’s loan preference. Some homebuyers may have their eyes on an adjustable-rate mortgage (ARM), especially because their interest rates are usually lower than fixed-rate mortgages — at least until they start adjusting after the fixed period.

The average 5/1 adjustable-rate mortgage has a 3.77% interest rate, according to Freddie Mac’s Primary Mortgage Market Survey. By contrast, the typical 30-year fixed-rate mortgage has an interest rate of 4.20%.

Keep in mind that interest rates can be unpredictable, even though you can control some of the factors that determine your rate. The APR for an ARM is calculated based on the assumption that the loan will be fixed for its introductory period and then adjusted according to today’s economic index values (“today” being the date the disclosures are issued).

In the case of a 5/1 ARM, the rate is fixed for the first five years of the loan and then adjusts annually thereafter according to the LIBOR index — plus a margin, which is the amount of percentage points your lender adds to the LIBOR index number to calculate your interest rate.

The APR on a 5/1 ARM would likely be calculated based on the assumption it will remain at its starting rate for five years, then adjust according to the current LIBOR index and the lender’s margin, and continue adjusting for the remaining 25 years.

It’s doubtful that in five years, when the interest rate adjusts, the LIBOR rate will be at the exact same level it is today. It’s also practically impossible that the LIBOR rate will then remain the same for the following 25 years. As such, calculating the APR on an ARM appears to be like a moving target.

ARMs are calculated based on current economic conditions, so the APR of a loan on Monday would be different from the APR of that same loan on Friday, similarly to how interest rates move. If you really want to compare the APR of ARM loans, get your mortgage quotes on the same day, and preferably around the same time. This is easiest to manage with the help of an online marketplace like LendingTree, which offers real-time rates and quotes.

Remember to compare APRs on the same loan type and term: 30-year fixed to 30-year fixed, 5/1 ARM to 5/1 ARM and so on.

Remember these tips when shopping for a mortgage

Don’t just settle on one mortgage lender before doing your due diligence — shop around. Taking the time to comparison shop can save you money in the long run. When comparing rates alone, homebuyers could see a potential savings of more than $41,000 in interest over the life of a 30-year fixed-rate $300,000 mortgage by loan shopping, according to LendingTree’s latest Mortgage Rate Competition Index.

As you prepare to get a mortgage, consider the following tips as you comparison shop:

  • Improve your credit profile. One of the main factors that determine your cost of borrowing a mortgage is your credit score. Put yourself in a more favorable position with lenders by maintaining on-time payments for your existing obligations, paying down debt and removing any errors you may find on your credit reports.
  • Ask about rates. Ask each lender you contact for a list of their current mortgage interest rates, including information on whether the rates are fixed or adjustable and what loan terms (15 years, 30 years, etc.) the rates apply to.
  • Negotiate costs and fees. Aside from the interest rate, a mortgage involves many costs, including underwriting fees, title fees and other closing costs. When you receive your Loan Estimate, review these costs and negotiate where you can.

FAQs about mortgage interest rates and APRs

What is amortization?

When you pay down a mortgage over time, you’re participating in amortization, which is the gradual reduction of debt by making scheduled principal and interest payments.

What are origination fees?

Origination fees are upfront charges a lender imposes as part of funding your mortgage. It may encompass a variety of different fees added together, such as an underwriting and processing fees and other administrative costs. Origination fees will be listed on Page 2 of your Loan Estimate.

What are discount points?

Discount points are fees paid directly to a mortgage lender in exchange for a reduced interest rate. This may also be referred to as “buying down the rate.” Paying points also lowers your monthly mortgage payment. One point is equal to 1% of your loan amount.

What is a mortgage rate lock?

A rate lock is a commitment between a mortgage lender and borrower that allows the borrower to secure a specific interest rate on their loan for a predetermined period. The interest rate won’t increase or decrease during that time frame, and the borrower is expected to close on their loan before the rate lock expires.

What’s mortgage insurance?

Mortgage insurance is a policy that protects your lender if you default on your mortgage and your lender needs to sell your home to try and recover the money you neglected to repay. If your home sells for less than it’s worth, mortgage insurance helps make up the difference.

Homebuyers who make less than a 20% down payment on their home purchase are typically required to pay for mortgage insurance. It lowers the lender’s risk in making the loan.

The bottom line

Understanding how APRs work may seem a bit complicated at first, but breaking down the costs of borrowing and taking advantage of an online calculator can help bring more clarity.

The main takeaway is that shopping around for a home mortgage will help you get your best deal. It’s not always easy to compare different mortgages apples to apples but the Federal Trade Commission has a mortgage shopping worksheet that can help. Additionally, remember to comb through your Loan Estimates.


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