If you’re like many prospective homebuyers, you may have seen both terms “APR” and “interest rate” and wondered what the difference is between the two of them. While these two terms are similar and both useful, there are important distinctions you will need to be aware of while shopping for your loan. The key distinction between the interest rate and the APR is this: the interest rate does not include fees associated with your loan.
What is the difference between APR and interest rate?
When you take out a mortgage loan you are charged monthly interest payments made to your lender. This amount is represented as a percentage typically known as your interest rate. Your APR, or annual percentage rate, reflects this interest rate as including the total cost of the loan. The interest rate represents the partial payment on the loan balance, while the APR reflects the entire loan with all closing costs included.
To get an estimate of today's interest rates, log in to Neat's website and check out our mortgage rate calculator. Keep in mind, mortgage rates fluctuate daily and the rates provided by our calculator are just estimates, not guarantees.
Interest rate tells you how much the principal of the home loan will cost you annually. This calculation does not include fees, insurance, and other costs. The interest rate is a partial cost, represented by the cost of borrowing the principal only.
Annual percentage rate (APR) tells you how much the home loan plus the additional fees will cost annually. Fees such as closing costs, origination fees, discount points, and mortgage insurance will be included in the APR. In other words, it’s the total cost, the cost of borrowing the principal plus the other fees.
The Federal Truth in Lending Act, which was enacted in 1968, protects you by requiring all lenders to disclose the full amount you’ll be expected to pay for a mortgage loan—the APR. When you’re shopping for a lender, APR is a great tool to use to compare the cost of your potential loans.
When shopping for your loan, make sure you review the full loan estimate, and not just the interest rate and APR. Your full loan estimate will contain all of the detailed information about the fees, closing costs, and projected monthly payments of your loan. Your home loan advisor can help you understand all of the terms and conditions presented in your loan estimate. You can find your interest rate on page one of your loan estimate, and your APR on page three.
Comparing APR and interest rate
Here are some of the fundamental differences between interest rates and annual percentage rates:
At Neat Loans, we make our fees and closing costs transparent from day one, and will not add any fees without full disclosure. To discover how Neat can help put you in the home of your dreams, get a quote today.
February 10, 2023
Your Interest Rate and APR on your mortgage loan both affect your overall payment. Here is the difference between interest rate and APR.