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by Lindsey Peterson / Mar 04, 2019

Interest Rates vs. APR

What is the difference between interest rates and APR, and why are they important to your mortgage? Both of these numbers are important because they allow you as a consumer to compare loans, as well as determine how affordable the loan itself is. Understanding interest rates and APR will help you become a pro mortgage shopper! 

Here’s some quick facts about each you need to know:

Interest Rate

  1. The interest rate is the cost of borrowing the principle amount of the loan.
  2. Rates can be fixed or adjustable
    1. A fixed rate always stays the same
    2. An adjustable rate mortgage or ‘ARM’ can change over the life of your loan, making your monthly payment higher or lower.
  3. Your credit score is a big determinant of your interest rate. The higher your credit score, the lower your interest rate will be. 

APR

  1. APR stands for Annual Percentage Rate
  2. Your APR will be determined by the lender and will vary from lender to lender, as each lender charges different fees and costs. (Except for us, we don’t charge ANY lender fees!)
  3. The APR basically includes all of the costs of financing and is usually higher than the interest rate. 

When you receive different Loan Estimates and compare them its important to pay attention to these two factors. Interest rates are a significant part of the estimate, because the interest reflects a large part of your monthly payment. With a lower rate, you’ll pay less interest over the life of the loan. Your monthly payment is based on the interest rate and principal balance, not the APR.

Knowing the difference between interest rates and APR, but also how they work together to mold your mortgage as a whole is critical to becoming an informed consumer. It’s also smart to compare APRs because interest isn’t the only cost that comes along with your loan. Some of the costs included in the APR will be things like points, broker fees, origination fees, etc. 

Your Mortgage

To calculate your monthly payment, click here for our simple mortgage calculators. 

To get started with the mortgage loan process, get a free rate quote, or fill out our online loan application to get pre-approved!

Be Prepared

Take a look at our checklist to see the basic documents you’ll need to apply.