Interest Rate vs. APR
Your interest rate is the cost of borrowing money, expressed as a percentage. Your APR (Annual Percentage Rate) includes the interest rate plus certain lender fees, giving you a broader picture of the total cost of the loan.
The interest rate determines your monthly principal and interest payment. The APR is typically higher because it factors in costs like origination fees, discount points, and certain third-party charges. Both numbers appear on your Loan Estimate. Learn how to read yours in our Loan Estimate guide.
APR is useful for comparing loan offers from different lenders, but it assumes you will keep the loan for its full term. If you plan to sell or refinance within a few years, the note rate and total closing costs may be more relevant to your decision than the APR alone.
Why This Matters: Comparing rate alone can be misleading. A lower rate with higher fees may cost more than a slightly higher rate with lower fees. Understanding both numbers helps you evaluate offers accurately and choose the loan that truly costs less for your situation.
Common question
Why is my APR higher than my interest rate?
APR includes your interest rate plus certain fees like origination charges and discount points. It reflects the broader cost of borrowing, which is why it is almost always higher than the note rate.
Should I compare loans by rate or APR?
Both matter. Rate determines your monthly payment. APR helps you compare total cost across lenders. If you plan to keep the loan long-term, APR is a strong comparison tool. If you plan to move or refinance soon, focus more on rate and upfront costs.
Related Topics
Related Mortgage Terms
Confused by the difference between rate and APR on your Loan Estimate? We will explain exactly what each number means.
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