Interest Rate vs. APR Mortgage: What Are the Differences?


As of March 2022, the average interest rate on a 30-year mortgage was 4.18%. But, of course, the interest rate you get with a mortgage depends on multiple factors, including your credit score and down payment amount. 

When you start thinking about getting a loan, you might have a few questions. For example, have you ever wondered about the difference between the interest rate vs. APR mortgage rate? 

You’ll hear about both terms when you start working on a mortgage loan, but it’s crucial to know the difference. This guide explains what both terms mean and the differences between them.


The Basics of the Interest Rate on a Mortgage

So, what is the interest rate on a mortgage? That’s often the first question borrowers ask when applying for one. They want to know the rate as it affects their payment amount and total loan amount. 

The interest rate on a mortgage is the stated rate the lender tells you when approving your loan. For example, they might tell you that your loan has a 4% interest rate. 

This rate affects the interest charges you pay each year. For example, if you get a 5% rate on a $200,000 loan, you’ll pay $10,000 in interest charges for the year.

Now, the interest amount you pay actually varies each year, as lenders base it on your principal loan balance. They also may calculate it monthly instead of annually.

Therefore, each month your lender multiples your monthly interest rate times your principal balance to determine the interest charges for that month. 

If you read through an interest rate mortgage guide, you’ll also learn that lenders provide a statement when you initially get the loan. They call this an amortization schedule.

This schedule shows how much interest you’ll pay for the entire loan if you make every payment on its due date. Of course, if you make your payments early or pay extra, it changes this chart. 

If you look at an amortization schedule, you’ll notice that you pay the most interest at first. After that, your interest gradually goes down each month because your principal balance decreases. 


How APR Mortgage Rates Work

Now that you understand the interest rate and how it works, you can move on to the APR mortgage rate. What is an APR mortgage rate, you might wonder? Is this different from the interest rate?

The APR rate is different from your loan’s interest rate, and there is one main distinction. The interest rate doesn’t include any fees, charges, or additional expenses, while the APR rate does. 

Your mortgage APR reveals a more accurate cost you pay for the loan, as it includes other expenses. For example, if you pay points on your loan, the APR includes these costs. 

The APR also includes broker fees, loan fees, and any other mortgage costs. So when you add those up and add in the interest charges, you learn your APR.

Therefore, your APR reveals the true cost of the loan. It’s a more comprehensive calculation than the interest rate.

As a result, you should compare the APR on loans when choosing one, as this is a better reflection of the costs you’ll pay. 


Factors That Affect the Rate You Pay

You might be wondering why this matters. The truth is it matters for several reasons. The primary reason to learn this is to compare loan options. 

You can compare numerous loan types, including 0 deposit home loans, to find the one that offers the best rate and terms for your situation. You can also ask about other loan types as you search for one.

Additionally, you might want to learn about the factors that affect the interest rate and APR you pay for the loan you acquire. Multiple factors affect these things, including the following:


Credit Score

Lenders run credit checks before issuing loans. They also run them before approving loans. 

The point is for the lender to see a person’s creditworthiness. An excellent credit score reveals a person who pays their bills in a timely manner. People with high scores work hard to get these scores and keep them. 

Your credit score affects the rate you get, and it can also affect your eligibility to qualify for a loan. 


Down Payment

Most lenders also base the interest rates on a person’s down payment abilities. Therefore, you might qualify for a lower rate if you offer a larger amount down, as this reduces the lender’s risks. 


Mortgage Loan Fees

The lender’s fees for the loan also affect your rate, but these fees only affect the APR. They don’t change the stated interest rate. 



Finally, the loan terms you choose also play a role in the rate you get. For example, you might get a lower rate if you choose a 15-year loan instead of a 30-year loan.


The Effects of Your Rate on Your Loan Payments

Finally, you may want to delve into the effects your rate has on your loan. Of course, the most significant impact of an interest rate is the interest costs for borrowing the money. 

A higher rate leads to a higher monthly payment. A higher rate also leads to paying more for the total cost of the loan. On the other hand, a lower rate leads to a lower payment and a lower total loan cost. 

The bottom line is that you might want to shop around for the best rate on your loan. When you find the best rate, you’ll save money. 

A model of the house is placed on the table next to sets of coins


Understanding Interest Rate vs. APR Mortgage Rate Is Helpful When Getting a Loan 

Borrowing money comes at a cost, and the interest rate you get affects the amount you must repay. Understanding the interest rate vs. APR mortgage rate is helpful when choosing a loan to buy a home. 

In fact, learning about mortgage options and types is also crucial when searching for a loan to get. 

If you enjoyed this article, check out some of the others on our website. 


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