APR vs Interest Rate

Difference Between Mortgage APR and Interest Rate

The Mortgage APR is a wider term that measures the cost of the mortgage as it includes interest rate and other costs like discount points, broker fees and closing costs in percentage terms whereas an interest rate is just the borrowing cost of the principal that is the loan amount which can be either fixed or variable but always expressed in percentage terms.

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Source: APR vs Interest Rate (wallstreetmojo.com)

Understanding both rates is particularly important if you’re a home buyer or deal with anything related to buying home. Otherwise, you will end up paying a lot more money than necessary.

  • The basic difference between the interest rate and APR mortgage is the former is always expressed in a percentage, and the latter is expressed as a broader cost of borrowing, including the broker fees, discount points, closing costs, etc.
  • In simple terms, if you’re someone who is worrying about the monthly payment, you should focus on the interest rate because the interest rate decides the monthly payment. On the other hand, if you’re worried about the total cost of the mortgage, then you should pay heed to APR (Annual Percentage Rate). If you want to reduce the total cost, try to reduce the APR. Otherwise, try to reduce the interest rate.
  • Every homebuyer should look at the interest rate first and then see the discount points (if any) and the fees. And after taking into the interest rate plus the discount points and the broker fees, the homebuyer should calculate the APR. APR will always be more than the interest rate. And that’s why looking only at the interest rate would be imprudent at the time of the purchase.
  • Another thing that you need to consider while looking at both the interest rate and the APR is the time horizon. If you want to stay in a newly purchased home for a long time, let’s say for more than 40 years, it makes sense to go for the lowest APR possible. But if you’re taking a home loan just for a short stint, then it’s better not to pay any upfront cost and go for the higher interest rate and also a higher APR.

But if you’re not sure how long you’ll stay in that house, do a break-even analysisBreak-even AnalysisBreak-even analysis refers to the identifying of the point where the revenue of the company starts exceeding its total cost i.e., the point when the project or company under consideration will start generating the profits by the way of studying the relationship between the revenue of the company, its fixed cost, and the variable cost.read more. By finding out when you’ll have no profit, no loss, you will be able to plan better. The funny thing is the lenders will not share the information with you about the break-down of APR if you aren’t aware of it. As a home buyer, you need to ask about the total cost of the loan and how much interest you need to pay. Along with that, ask for the broker fees, discount points, and closing costs. If you talk to various lenders, you will see each lender has their own set of expenses, fees, etc.

Mortgage APR vs Interest Rate Infographics

Let’s see the top differences between APR vs Interest Rate.

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Source: APR vs Interest Rate (wallstreetmojo.com)

Key Differences

Mortgage APR vs Interest Rate Comparative Table

Basis for comparisonMortgage APRInterest Rate
MeaningMortgage APR is the overall cost of the loan.It is the applied interest rate on loan.
Accounts forMortgage APR accounts for closing costs, broker fees, discount points, etc.The interest rate accounts for calculating amortization.
Does it change?It may change if you go for refinancingRefinancingRefinancing is defined as taking a new debt obligation in exchange for an ongoing debt obligation. In other words, it is merely an act of replacing an ongoing debt obligation with a further debt obligation concerning specific terms and conditions like interest rates tenure.read more or reselling.It will remain constant.
Time horizonIf you look for a long-term stay in your newly bought home, go for the lowest APR.If you would stay for a short-stint, look for a lower interest rate.
EmphasisThe emphasis is on the overall cost of the loan.The emphasis is on the monthly payment.

Conclusion

It’s wiser to see through both the APR and interest rates while taking a home loan. You will find that the interest rate is constant for all lenders, but the mortgage APR will be different. Since the mortgage APR includes costs that are variable for different lenders, the mortgage APR would vary.

Thus, first, think about what you want (stay for a short-stint or a long-haul), look at all the minute details, calculate both rates (if they’re already not given to you), and then decide.

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