Mortgage Interest Rate vs. APR Explained

Before you purchase a home, it’s important to know how much your mortgage will cost you — it’s more than what you borrow. If you’re buying a home with a high interest rate, you’ll want to shop around to find your best rate, and you should compare how much interest you’ll pay with each mortgage option. Many buyers confuse a loan’s interest rate with its annual percentage rate (APR), believing the two are the same. As a result, they may compare loans using only the interest rate, when it’s really the APR that tells you the true cost of a loan.  

In this article, we’ll discuss mortgage APR vs. interest rate, how each one works, the differences between the two, and how to find competitive rates on your next home loan.  

Key takeaways 

• Your mortgage interest rate is the cost of borrowing, while APR includes lender fees and other finance charges, giving you a clearer picture of your loan’s true cost. 
• Mortgage insurance, origination fees, discount points, and other charges increase your APR.  
• The more fees a loan has, the bigger the gap between APR and interest rate. 
• A lower interest rate doesn’t always mean a cheaper loan — higher fees can drive up the APR, making one loan more expensive than another. 
• Shopping around and comparing both interest rates and APRs helps you find the best deal.  

APR vs. Interest rate: What’s the difference?

Your loan’s interest rate is just the cost of borrowing money — nothing more. APR, on the other hand, includes the interest rate plus any lender fees and other finance charges, giving you a more complete picture of what you’ll actually pay.  

If the loan doesn’t include any closing costs, it’s possible that the interest rate and APR could be the same, but your APR will never be lower than your interest rate. 

So where should you look to compare APR vs. interest rate? Lenders are required to disclose both under the Truth in Lending Act (Regulation Z). You’ll see them clearly listed on your loan estimate and closing disclosure, which are key documents breaking down the cost of your mortgage. 

What is APR? 

APR is the true cost of borrowing. It’s determined starting with your interest rate and goes up as fees are added. Most lenders charge at least some fees, which can be 1% to 2% of the loan amount — or more. 

While some fees aren’t part of the APR, some of the common ones included are: 

• Mortgage insurance 
• Loan origination fees 
• Discount points 
• Prepaid interest 
• Underwriting fees 
• Document preparation fees 
• Administrative fees 
• Escrow fees 
• Application fees 

By looking at APR vs. interest rate alone, you get a clearer comparison between your loan options. A loan with a lower interest rate but higher fees might actually cost more than one with a slightly higher rate and lower fees.  

How it works 

Here’s how APR is calculated: Lenders start with the interest rate, then add in fees like mortgage insurance, origination charges, and discount points. That total, plus your loan term, is used to determine your APR. The more fees a loan has, the bigger the gap between the APR and the interest rate. 

Since mortgage closing costs can account for 2% to 6% of the loan amount, two loans with the same interest rate might have very different APRs.  

For example, let’s say you want to take out a $300,000, 30-year fixed-rate mortgage with a 7% interest rate. You’re comparing two loans: 

• Loan A: No closing costs, so the APR remains at 7% 
• Loan B: Includes a 1% origination fee ($3,000) and other lender charges ($3,000), which adds $6,000 to your loan and raises the APR to 7.2%. 

At first glance, these loans look the same. But one costs more over time, and you can tell which one by comparing the APR.  

What is interest rate?

An interest rate is the price you pay to borrow money. Lenders charge interest as a percentage of your loan amount, representing the annual cost of borrowing. While it shows the base cost of a loan, it doesn’t include fees. That’s where APR comes in.  

A lower interest rate doesn’t always mean a better deal. A loan with a slightly higher interest rate but lower fees might actually save you money.  

How it works

Interest rates aren’t random — they’re determined by a mix of big-picture economics and personal financial factors like your income and credit. 

At a high level, mortgage interest rates fluctuate based on the overall economy and Federal Reserve policies. Lenders also consider the type of loan you apply for, your employment history, income, assets, and credit score to determine your rate.   

For example, a fixed-rate mortgage usually has a higher interest rate than an adjustable-rate mortgage (ARM) because the lender often anticipates rates will rise in the future. With an ARM, they can adjust the rate later, but fixed loans lock in the rate for good. 

Lenders assess your individual creditworthiness to evaluate how likely they think you are to pay your loan back on time. A higher credit score and verified income signal that you’re a responsible borrower, while a high debt-to-income ratio and a poor credit score signal more risk. When lenders perceive a higher loan risk, they’ll charge a higher interest rate to compensate for taking on what they believe is a riskier mortgage.  

In short, getting your credit mortgage-ready could help you appear as a lower risk to lenders — and secure a lower rate. 

Finding competitive rates 

Understanding APR vs. interest rate is key to making a smart mortgage decision. While the interest rate tells you how much you’ll pay to borrow money, APR gives you the full picture by including lender fees. Looking at both numbers is essential when comparing your loan options. 

If you’re shopping for a mortgage, the best way to find a competitive rate is to compare offers and work with a lender that prioritizes transparency and convenience — like AmeriSave. With our fast digital process and expert guidance, AmeriSave makes financing easier for home buyers. 

Ready to see how much you could save? Get a personalized rate quote in just minutes — no commitment, no hidden fees. 

Frequently asked questions 

Why is APR higher than interest rate? 

The APR is often higher than the interest rate because it includes fees associated with the loan, such as mortgage insurance, prepaid interest, discount points, and origination fees.  

What does 0% APR mean? 

0% APR means there’s no cost to borrow money for a specified period. Typically, 0% APR is an introductory rate that’s used for promotional purposes. After the introductory period ends, the lender will start to charge interest.  

What’s a good APR? 

Since rates are constantly changing, a good APR is often considered one that’s below the current averages. For example, if the average APR on a 30-year fixed-rate mortgage is 8%, a good APR might be 7.80%.