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What’s the difference between mortgage rate and APR?

The mortgage interest rate represents the cost of borrowing money as a percentage of the principal loan amount. It is the base rate you are charged for borrowing the funds. In contrast, the APR provides a more complete view of your loan’s total cost. The APR combines the interest rate with other lender fees, such as origination fees or discount points. The APR can help borrowers understand the overall financial impact of their loan, and make it easier to compare different mortgage offers.

What is a good APR for a mortgage?

Several factors affect what a “good” APR is:

  • Current market conditions: Interest rates change based on factors like the Federal Reserve’s policy, inflation and overall economic health. Lower economic growth can lead to lower rates, while a booming economy with rising inflation can increase rates.
  • Credit scores: Your credit score has a large impact on the APR you’ll get. A higher credit score usually means a lower APR. For example, a score of 760 or above might get an APR around 3.5% to 4.0%, while a score between 620 and 639 might see APRs in the 5.0% to 6.0% range.
  • Loan type: The type of mortgage – conventional, Federal Housing Administration (FHA), Veteran’s Affairs (VA), or jumbo – also affects the APR, due to different requirements and risk assessments.

A “good” APR can vary depending on these factors. To get the best rates:

  • Improve your credit score: Pay down debt, make timely payments and avoid new credit inquiries before applying for a mortgage.
  • Shop around: Compare mortgage rates from different lenders.
  • Consider loan options: Decide if a fixed-rate or adjustable-rate mortgage (ARM) fits your financial situation better. Fixed-rate loans have a fixed rate and fixed monthly payment for the entire loan term. ARMs have an initial fixed-rate period of five to 10 years and an adjustable rate for the remaining life of the loan.

When choosing a lender and a mortgage, watch for:

  • Hidden fees: Some lenders might have low rates but high fees, increasing the APR.
  • Prepayment penalties: Make sure there are no penalties for paying off your mortgage early. At U.S. Bank, you can repay your loan before the end of the term without any penalties.
  • Variable APRs: Be aware of adjustable-rate mortgages. While they typically have lower rates than 30-year fixed-rate loans during the initial rate period, your monthly payment could increase or decrease after the introductory period depending on how the index rate fluctuates.

Understanding these factors and reviewing your options carefully can help you make decisions that suit your financial goals.

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Understanding the differences between mortgage APR and interest rates can help you be better-equipped to make sound decisions for your home investment. Want to learn more? Check out our mortgage calculators to help estimate your potential costs and savings. If you’re looking for personalized advice, you can also connect with our mortgage loan officers. U.S. Bank is here to provide the expertise and support you need every step of the way.

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Disclosures

Loan approval is subject to credit approval and program guidelines. Not all loan programs are available in all states for all loan amounts. Interest rate and program terms are subject to change without notice. Mortgage, Home Equity and Credit products are offered through U.S. Bank National Association. Deposit products are offered through U.S. Bank National Association. Member FDIC.