Routing # 256078446
MORTGAGE KNOWLEDGE CENTER
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What Is the Difference Between Your Interest Rate and APR?
What you'll learn: What Is the Difference Between Mortgage Interest Rate & APR?
EXPECTED READ TIME: 5 MINUTES
October 7, 2022
Shopping for a mortgage isn’t something you do regularly and because of that, it can be confusing. There is a way to make comparing your options easier and avoid unpleasant surprises. That’s where annual percentage rate (APR) comes in.
Many people, especially new homebuyers, wonder if interest rate and APR are the same thing. The quick answer is no. Let’s examine their differences and share why each is important in the homebuying process.
APR vs. interest rate
Both terms are expressed as annual percentages, so how are they different? To understand the difference between interest rate and APR, let’s start by looking at each term individually.
What is interest rate?
In the mortgage world, interest is what you pay to borrow money from a lender. Your interest rate is an annual percentage of your balance that determines how much you will pay to borrow that money. It’s typically the most common rate advertised by mortgage lenders.
What is APR?
APR stands for annual percentage rate. It takes a more holistic view of a loan, taking into account interest plus some of the fees associated with the loan. That’s why you’ll usually find a loan’s APR to be higher than its interest rate.
APR generally includes costs such as:
- Interest
- Origination fees
- Discount points
- Mortgage insurance
Why does the interest rate and APR difference matter?
Shopping for a mortgage often starts by comparing interest rates, but it shouldn’t end there. Interest rates only tell part of the story. A mortgage comes with additional fees that can affect your monthly payment and how much you pay for the loan overall. The APR allows you to comparison shop more accurately.
APRs aren’t always readily available, but thanks to the Truth in Lending Act, lenders are required to disclose certain loan terms – including APR – to help consumers make financially sound decisions. For this reason, you’ll always be provided the APR on a loan estimate before you sign off. If you want to know the APR before getting an official estimate, you have every right to ask your lender for this information.
Interest rate vs APR mortgage example
Let’s say you’re trying to decide between two mortgages offered by different lenders. Lender A offers you an interest rate of 5.75 percent while Lender B offers 5.5 percent with the purchase of a discount point, which increases your closing costs by thousands of dollars. You also find out Lender B has higher origination fees. How do you know which option is better?
The answer is not immediately clear, so you use an amortization calculator and lay out the offers side by side.
| Lender A | Lender B |
Loan Amount | $250,000 | $250,000 |
Loan Term | 30 years; fixed rate | 30 years; fixed rate |
Interest Rate | 5.75% | 5.50% |
Closing Costs | $7,500 | $13,000 |
Monthly Payment | $1,459 | $1,419 |
Total Cost of Loan | $525,216 | $511,010 |
Total (P&I + Closing Costs) | $532,716 | $524,010 |
Finally, you can see how paying the higher upfront fees with Lender B helps you save on both your monthly payment and in the total amount paid for the loan — including closing costs.
While this is a worthwhile exercise, it can be time consuming and isn’t always feasible when you’re trying to narrow down a potential list of multiple lenders. Enter: APR.
| Lender A | Lender B |
Interest Rate | 5.75% | 5.50% |
APR | 5.871% | 5.798% |
At a quick glance, you can see Lender B’s APR is lower. Its APR is 0.298 percent higher than its interest rate, showing there are additional fees tucked into the loan. In contrast, Lender A’s APR is only 0.121 percent higher than its interest rate. You can safely assume the closing costs are lower.
Is the loan with the lowest APR always the right choice?
Not necessarily. Like so many financial decisions, the answer is not black or white. In our example, you may have assumed you should choose Lender B because the loan would cost less. But there are times when Lender A may make sense.
Take, for instance, if you’re planning on selling your home in the next few years. You may not want to pay all those upfront costs when you won’t be in the house long enough to make the expense worthwhile. You may accept a slightly higher monthly payment, knowing you saved on closing costs.
Lender B also wouldn’t make sense if you don’t have enough cash available for the higher closing costs or you know you are going to need the funds for something else in the near future.
A final look: What’s the difference between interest rate and APR?
To wrap up this comparison, let’s look at some high-level similarities and differences between rate and APR.
Interest Rate and APR Similarities | Interest Rate and APR Differences |
Every loan must disclose an interest rate and an APR before a borrower signs. | APR takes into account interest rate and certain fees associated with a loan. |
Both are expressed as annual percentages. | APR offers a more holistic way to compare loan options. Interest rate, while also helpful, only tells part of the story. |
Neither takes into account title or abstract, notary, home inspection, appraisal, or credit report fees. | A mortgage APR is typically higher than its interest rate. |
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Home Buying Steps
Mortgage Products
Disclosures
1Conventional Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 75%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
2FHA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.0 discount point, which equals 1.0 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $400,000; loan-to-value ratio of 96.5%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
3VA Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 1.125 discount point, which equals 1.125 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, conforming, fixed-rate loan. Loan amount of $450,000; loan-to-value ratio of 95%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of $995.
4Jumbo Loans
Except for holidays, rates are updated Monday through Friday at 10:15am EST. The advertised rates and points are subject to change. The information provided is based on 0.625 discount point, which equals 0.625 percent of the loan amount, and assumes the purpose of the loan is to purchase a property with a 30-year, non-conforming, fixed-rate loan. Loan amount of $1,009,000; loan-to-value ratio of 70%; credit score of 760; and DTI of 18% or less. The property is an existing single-family home and will be used as a primary residence. The advertised rates are based on certain assumptions and loan scenarios, and the rate you may receive will depend on your individual circumstances, including your credit history, loan amount, down payment, and our internal credit criteria. Other rates, points, and terms may be available. All loans are subject to credit and property approval.
Rates quoted require a loan origination fee of 1%; not to exceed $1,995. Speak to a PenFed Mortgage Loan Officer for additional details.
Fixed Rate Advance Lock-In You may lock in an Annual Percentage Rate for Advances during the Advance Period. During your Advance Period, you may choose to have three separate Fixed Rate Advances locked in at any one time, with a maximum of two new Fixed Rate Advances per calendar year. Each Fixed Rate Advance must equal or exceed Ten Thousand Dollars ($10,000.00) and you may not request a Fixed Rate Advance that would cause the amount you owe to exceed your Credit Limit. The only term option for your Fixed Rate Advance is 240 months (“Fixed Rate Advance Term”). However, the term of your Fixed Rate Advance cannot exceed your Repayment Period.
Routing #256078446
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