Defining the Interest Rate
The interest rate is the cost you pay each year to borrow money, expressed as a percentage rate. It is the rate used to calculate your monthly principal and interest payment.
The interest rate does not reflect fees or any other charges you may have to pay for the loan. Two loans with the same interest rate can have very different total costs once fees are included.
Sources: Consumer Financial Protection Bureau
Defining the APR
The annual percentage rate (APR) reflects the interest rate plus any points, mortgage broker fees, and other charges you pay to get the loan.
Because it includes those costs, the APR is usually higher than the interest rate. This number helps you compare loans that have different combinations of rates and fees.
Key Differences at a Glance
The table below summarizes the main differences between the interest rate and the APR. Both are important, but they answer different questions: the interest rate tells you the base cost of borrowing, while the APR gives a more inclusive picture.
| Aspect | Interest Rate | APR |
|---|---|---|
| Definition | Annual percentage cost of borrowing, before fees. | Annual percentage cost, including fees and other charges. |
| Fees included | Does not include fees. | Includes points, broker fees, and other charges. |
| Basis for monthly payment | Yes - your monthly payment is calculated from this rate. | No - APR is not used to calculate your monthly payment. |
Sources: Consumer Financial Protection Bureau, Bankrate, Bank of America
What Fees Are Included in APR?
The APR includes many of the costs you pay to secure the loan, not just the interest. Common examples are origination fees, discount points, and mortgage broker fees. Mortgage insurance may also be included if it applies to your loan.
Because the exact list can vary somewhat by lender, the Consumer Financial Protection Bureau (CFPB) sets the rules for what must be included in the APR calculation.
- Origination fees
- Discount points (paid to lower your rate)
- Mortgage broker fees
- Mortgage insurance (when applicable)
How APR is Calculated
The APR starts with the interest rate and adds in the fees listed above. The more fees a loan carries, the bigger the gap between the APR and the interest rate.
In general, a loan with a lower interest rate but high fees may end up with a higher APR than a competing loan with a slightly higher interest rate and lower fees. That is why comparing APRs gives you a better sense of the total cost over the life of the loan, assuming you keep it for the full term.
Why APR Matters for Comparison
When you shop for a mortgage, you will see both an advertised interest rate and an APR. The APR is meant to level the playing field by including the costs that can differ between offers.
To get a fair comparison, always compare APRs to APRs and interest rates to interest rates. Never compare the interest rate of one offer to the APR of another.
The Truth in Lending Act requires lenders to disclose both your interest rate and your APR. On the official Loan Estimate, you will find the interest rate on page 1 under 'Loan Terms' and the APR on page 3 under 'Comparisons'.
Sources: Consumer Financial Protection Bureau, Chase, Bank of America
APR and Its Limitations
The APR is a helpful tool, but it has limits. It assumes you will keep the loan for its entire term. If you expect to move or refinance within a few years, the APR can overstate the cost of the loan for your situation.
For adjustable-rate mortgages (ARMs), the APR does not reflect the maximum interest rate the loan could reach. After the introductory rate period ends, your rate could adjust upward significantly, and that potential future cost is not captured in the APR.
So while the APR is a valuable comparison metric, it is not the only number you need. Your interest rate affects your monthly payment, and the APR helps you weigh fees. Both deserve attention when you are deciding between offers.
Sources: Consumer Financial Protection Bureau, Chase, Bankrate, AmeriSave
Side-by-Side Comparison and Decision Criteria
The following matrix compares the interest rate and APR across categories and provides decision criteria to guide your choice.
| Category | Interest Rate | APR | Decision Criteria |
|---|---|---|---|
| Definition | Annual cost of borrowing before fees. | Annual cost including fees and charges. | Understand what each number includes. |
| Basis for monthly payment | Yes, used to calculate monthly principal and interest. | No, not used for monthly payment calculation. | Use interest rate to estimate monthly payment. |
| Fee inclusion | Does not include fees. | Includes points, broker fees, and other charges. | Compare APRs to assess total costs. |
| Term assumption | Does not assume a specific holding period. | Assumes you keep the loan for the full term. | If you plan to sell or refinance soon, rely more on interest rate and upfront fees. |
| Suitability for ARM | Does not reflect potential rate adjustments. | May not reflect maximum rate for adjustable-rate loans. | For ARMs, consider potential rate increases; APR may not capture them. |
Sources: Consumer Financial Protection Bureau, Chase, Bankrate, Bank of America
Frequently asked questions
Should I choose the loan with the lowest APR?
Not necessarily. The APR provides a fuller picture of total loan costs, but it assumes you will keep the loan for its entire term. If you plan to move or refinance within a few years, a loan with a higher APR but lower upfront costs might be better. Always compare APRs to APRs and interest rates to interest rates.
Sources: Consumer Financial Protection Bureau, Chase, AmeriSaveDo lenders always quote APR accurately?
The Truth in Lending Act requires lenders to disclose the APR on your loan documents, including the Loan Estimate. The CFPB sets the rules for how APR must be calculated. However, the exact fees included can vary, so it is wise to compare the APR from each lender and ask exactly what is included.
Sources: Consumer Financial Protection Bureau, Chase, Bank of AmericaCan APR change after closing?
For a fixed-rate loan, the APR is based on the interest rate and fees at closing and does not change over the loan term. For an adjustable-rate mortgage, the APR reflects the initial costs but not the maximum possible rate, so your actual rate could change after the introductory period.
Sources: Consumer Financial Protection Bureau, BankrateWhy is my APR higher than the advertised rate?
Because the APR includes fees beyond the interest rate, it is typically higher. The APR reflects the interest rate plus costs like origination fees, discount points, mortgage broker fees, and mortgage insurance. The more fees you pay, the bigger the gap between the APR and the interest rate.
Sources: Consumer Financial Protection Bureau, Chase, AmeriSaveSources
- What is the difference between a mortgage interest rate and an APR? — Consumer Financial Protection Bureau
- Mortgage APR vs. interest rate: Understanding the key differences — Chase
- APR vs. Interest Rate: What's The Difference? — Bankrate
- Mortgage Interest Rate vs. APR Explained — AmeriSave
- APR vs Interest Rate - What is the Difference — Bank of America