APR vs. interest rate: What's the difference?

If you’re comparing home loans, you’ll see two key percentages on every offer: the interest rate and the annual percentage rate (APR). Your interest rate is the cost you pay to borrow the money to buy a home. APR is a disclosure of the loan’s total cost per year over the full loan term, including the interest rate and other fees. Let’s look at the difference between interest rate vs. APR so that you can fully understand the cost of your mortgage options.

At a glance: Mortgage interest rate vs. APR

Here’s a quick breakdown of how interest rate and APR differ:

• The interest rate is the percentage of your loan amount the lender charges you as the cost of borrowing.
• APR includes the interest rate and loan fees, offering a more complete picture of a loan’s overall cost.
• It’s important to look at both the interest rate and the APR when you're comparing loan offers to fully understand the costs.

What is an interest rate, and how does it work?

An interest rate determines how much you pay the lender to borrow money to buy a home. It's expressed as a percentage of the loan amount.

The interest rate is an annual rate, and it's applied to your mortgage balance monthly to determine how your mortgage payment is divided between interest and principal.

The mortgage rate your lender offers you will be based on your credit score, down payment, loan amount, economic conditions, and loan type, such as ARM vs. fixed-rate mortgage.

Interest rate example

Say you want to buy a home for $450,000. You put down 20% and borrow $360,000 at 6.5% with a 30-year fixed-rate mortgage.¹ Your monthly interest rate would be the annual rate divided by 12.

6.5% / 12 = 0.54167%

That would be multiplied by your balance of $360,000 to determine how much interest you'll pay that month.

$360,000 x 0.54167% = $1,950

Amortization is a process that determines the payment amount so you can pay all interest and principal over the loan term, which is 30 years in this case. The payment for this loan amount and interest rate is $2,275.

Your first payment of $2,275 would consist of $1,950 in interest and $325 in principal. Your next month's payment will recalculate the interest you owe, using the new loan balance of $359,675.

You pay less interest and more toward the balance with each payment, so that the final payment pays off the entire loan amount.

An amortization calculator can help you understand how your monthly payment works for various loan types and interest rates.

What's APR, and how does it work?

APR is a disclosure that includes the loan's interest rate and any additional costs, such as prepaid interest, certain closing costs, mortgage points, and lender origination fees. APR averages those costs out over the loan term, even though you pay them at closing and they have no effect on your monthly payment.

That makes APR a broader, more comprehensive measure of the overall cost of a loan than just the interest rate, making it a useful tool for comparing mortgage offers.

A mortgage with a slightly higher interest rate but lower fees could be cheaper than one with a lower rate and higher fees. Comparing APRs shows which one is less expensive overall.

APR example

Let’s go back to our $450,000 loan example with a 6.5% interest rate. Let's say the lender charges you $3,500 in fees, plus you buy 0.5 discount points. Those costs would be included in the APR, along with the interest rate, for a total of 6.643%.

If you took out the same loan at the same interest rate, with no points, but paid $5,000 in loan fees, your APR would increase to 6.635%. This shows the latter example is the more expensive option, even though the interest rate and the monthly payment are the same.

How are interest rates and APR calculated?

Your interest rate drives your monthly payment, while APR spreads eligible up-front costs across the loan term to show the total cost.

Your mortgage rate is determined primarily by overall economic conditions, including current market interest rates. Your lender also will review your personal finances and adjust the rate it offers based on

• Your credit score
• Down payment amount
• Loan amount
• Loan term
• Interest rate type
• Loan type

Your APR is less of a calculation and more of a disclosure of the cost of a loan.

The APR will be higher than the interest rate on your loan, but it's the interest rate and loan amount, that determines the monthly payment. The difference between the APR and the interest rate reflects the up-front costs you'll pay for a loan.

Where do I find interest rates and APR on loan offers?

Thanks to the Truth in Lending Act, mortgage lenders must disclose both the interest rate and the APR up front. You’ll find this information on your Loan Estimate, which the lender must provide within 3 business days of receiving your mortgage application, and on your Closing Disclosure, which you’ll receive at least 3 business days before closing. If you aren’t provided this information, you should be suspicious of the loan offer and look for signs of a real estate scam.

How to get a lower interest rate

Securing a lower interest rate can save you a significant amount of money over the term of your mortgage. Here are a few strategies for getting the best interest rate.

Improve your credit

One way to get a lower interest rate is to improve your credit. To lenders, a higher credit score indicates lower risk. Here are some ways to improve your credit score:

• Always make your minimum loan and credit card payments on time.
• Limit the amount of money you put on credit cards.
• Pay down as much of your debt as possible.
• Avoid applying for new loans when you’re preparing to get a mortgage.

Get a government-backed loan

Government-backed loans tend to have lower interest rates compared with conventional loans. They also come with added benefits. For example, if your home goes into foreclosure and you have a loan insured by the federal government, the government agency backing your loan will reimburse your lender. This extra protection reduces the lender's risk, which is why they can often offer you a lower rate. Plus, many of these loans come with more flexible credit and down payment requirements, making them accessible to a wider range of borrowers.

Can I lower my APR?

Unfortunately, you have less control over your APR than you do over your interest rate.

Your lender controls the other factors that go into your APR, like origination fees and broker fees. Though there are some ways to reduce your APR, the best way to secure a better rate is to compare lenders.

Be sure to compare apples to apples. Make sure the same fees are being included in each APR so you can directly compare offers. And make sure you're comparing similar loans. Don’t compare the APR on a 30-year fixed-rate mortgage with the APR on a 5/1 ARM, since these loans aren’t the same.

The bottom line: APR vs. interest rate

While your interest rate is the percentage of the principal balance you pay on a loan, your APR includes your interest rate and other fees or expenses you’ll pay to your lender. Each represents how much you'll be paying for a loan, but APR includes a broader picture of the costs. Understanding the interest rate and APR you're offered can help you compare offers and select the best deal.

When you are ready to explore your options and see what your numbers look like in real time, take a few minutes to check current mortgage rates to get a customized estimate before applying.

¹ The payment on a $360,000 30-year fixed-rate loan at 6.5% is $2,275.44. The annual percentage rate (APR) is 6.643% and the loan-to-value ratio (LTV) is 80% for the cost of 0 points ($0) due at closing. One point is equal to one percent of the loan amount. Payment does not include taxes and insurance premiums. The actual payment amount will be greater. Rates shown valid as of May 15, 2026. Some state and county maximum loan amount restrictions may apply.