What’s the Difference Between Interest Rate and Annual Percentage Rate?

Interest Rate and Annual percentage rate — or APR — are they lost siblings? Brothers from another mother? Second cousins once removed? (What does that even mean?) The truth is, they’re related. They both exist in terms of the cost of borrowing money, but they represent different costs.

Once you hear the breakdown, we know you’ll get it. 

The Annual Percentage Rate, or APR, accounts for the costs of producing a loan, not just the loan amount itself. It’s a broader, more holistic view of the annual cost of the money that you’re borrowing. The additional costs included in your APR are:

  • Mortgage insurance
  • Broker fees
  • Origination fees
  • Discount points
  • Closing costs
  • And underwriting fees

An APR is the yearly cost of borrowing money, and because it also includes the interest rate, it may be higher than the interest rate itself. Line items like closing costs can vary by lender, so give the APR that you’re offered attention, as you could be offered the same interest rate by several different lenders, but they may all offer different APRs, meaning potentially more costs in fees. A good rule of thumb to know is that the closer the APR is to the advertised interest rate, the lower the lender’s fees will be.

So, what is an Interest Rate?

 An interest rate is simpler than the APR. It’s  a percentage that’s based only on the amount of money that you borrow for your home loan… that’s it. No other fees involved. It’s just the amount that you will pay to a lender to borrow money from them. It can be fixed, or variable – as is the case with an adjustable-rate mortgage – which can change at certain times depending on market conditions. We have a video on that, linked here.

Interest rates change frequently, daily even, as they are affected by many economic factors, like inflation, economic growth, and housing conditions. That’s why many borrowers choose to lock in a fixed rate, so their payment remains steady throughout the entire life of the loan.

The interest rate you receive is based on your:

  •   Down payment amount
  •   Financial situation
  •   Credit score
  •   The loan amount you’re requesting
  •   And your debt-to-income ratio

The Bottom Line:  You have more control over the interest rate you’re offered by upping your credit score and choosing a fixed-rate loan. You have less control over the APR that you’re offered because these costs are set by your lender. To find the lowest APR available to you, compare similar loan products among several lenders. Just make sure one of those lenders is Homespire.

Visit https://www.homespiremortgage.com/loan-officer-search to find a Homespire Loan Officer near you.