APR vs. Interest Rate: Why They're Not the Same Number
Mortgage quotes typically show two different percentages: the interest rate and the Annual Percentage Rate (APR). Confusing the two, or not understanding why they differ, is a common source of confusion when comparing lender offers. What the interest rate measures The interest rate is the percentage charged specifically on the loan's principal balance — this is the number directly used to calculate the principal-and-interest portion of the monthly payment. What APR adds on top APR is designed to reflect a fuller cost of borrowing by factoring in the interest rate plus certain fees and costs associated with the loan — items like discount points, some closing costs, and mortgage insurance in certain cases — expressed as a single annualized percentage. Because it bundles in these additional costs, APR is typically higher than the plain interest rate. Why APR was created APR exists specifically to make comparing loans with different fee structures easier. Two lenders might ...