Mortgage Basics: Interest Rate vs. APR

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What's the difference between Interest Rate and Annual Percentage Rate, or APR?

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These rates are both important, but they mean two different things when it comes to your mortgage loan. You typically hear about the Interest Rate more, because it's driven by the economy. It's the percentage of the loan amount that it costs to borrow money.

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This is the rate that is used to calculate the monthly principal and interest payment, but it's not the only factor in your monthly mortgage payments. Property taxes, homeowners insurance, mortgage insurance, and association dues can affect your payments even more.

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APR, Annual Percentage Rate, is different. It's a measure of the cost of credit. APR is the percentage that signifies the actual cost over the entire term of the loan, including closing costs and some third party fees, like the settlement fee.

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It doesn't directly influence your monthly payments. Because it's not used to calculate them. Instead, it's the cost of your specific loan amount represented annually.

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The APR is usually different from the interest rate, especially if you have an adjustable rate mortgage.

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Now, you know there are two rates. One tells you the basic cost to borrow. The other shows you the cost of credit over the life of the loan.

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Numerous houses unfold on paper to make a pamphlet. A red and blue logo, U.S. Bank.