Mortgage Interest Rates vs. APR – What’s the Difference?
First-time homebuyer? Decode "interest rate" and "APR." Understand these key terms for an informed and smooth home-buying journey.
Buying your first home is an exciting and significant milestone in your life, but it can also come with complicated financial terms to understand.
Two key terms that you'll come across when shopping for a mortgage are "interest rate" and "APR" also known as “Annual Percentage Rate.” While they both relate to the cost of borrowing money for your purchase, they are different. Before you start shopping, we’ll explore pro tips to help you understand what these terms mean and why they are both equally important.
Interest Rate: The Cost of Borrowed Money
The interest rate makes up the amount of interest that you are going to be paying on the principal balance of your mortgage or the actual loan amount.
There are many factors that go into what interest rate you may qualify for.
“The interest rate depends upon the type of loan that you take out, the type of property that you're buying, if you're going to be living in the home, the amount of money that you're putting into your down payment as well as your credit score,” says Kevin Bishop, Assistant Vice President of Mortgage Sales at FAIRWINDS.
See how much you can pay over the life of a mortgage loan by using our free Mortgage Calculator.
APR: The True Cost of Borrowing
In addition to the interest rate, there are other costs included in your mortgage rate. These costs, combined with the interest rate, make up your Annual Percentage Rate (APR).
Kevin explains, “APR is a combination of the interest rate that you're paying, the closing costs, the administration fees, and brokerage fees. Those are all rolled into the APR to truly show you what the cost of this mortgage will be. It's the total cost of the loan throughout the loan term.”
Why do both interest and APR matter?
“The interest rate can always look attractive to start. However, the APR is what you're actually paying to get that interest rate,” Kevin adds.
“For example, you might be offered a promotional interest rate of 6% with Lender A. When you look at the APR, there is likely a higher down payment required to qualify for that lower interest rate.”
Be sure to ask your lender for a clear breakdown of all costs and fees so you can make an informed decision and secure the best mortgage for your needs and budget. You can even schedule an appointment with a FAIRWINDS mortgage expert who can help you review your mortgage loan details to ensure you get the best deal possible.