What Is the Difference Between Mortgage Interest Rates and APRs?

The interest rate is used to calculate the interest of borrowing the principal amount of the loan, and is applied to that principal amount. The mortgage interest rate is expressed as a percentage, and it can be adjustable or fixed. Many factors can influence a specific interest rate, such as prevailing market interest rates and the borrower's credit score.

Annual Percentage Rate, or APR, is also expressed as a percentage. However, the APR includes both the mortgage interest rate as well as other costs of the mortgage loan, such as broker fees, discount points, and some closing costs. A mortgage's APR is therefore broader and more accurate with respect to the total price of the mortgage loan. Lenders will determine the APR, since the APR is composed of lender fees and other costs that vary from lender to lender. APR is therefore a better way to compare mortgages rather than the mortgage interest rate alone. Note that the Federal Truth In Lending Act (TILA) requires that lenders disclose the APR in every consumer loan agreement.

Tellus TIP:

APR is an all-inclusive measurement that reflects the total cost of a mortgage.