What is the interest rate?
The interest rate is the cost you will pay each year to borrow the money, expressed as a percentage rate, and it does not reflect fees or any other charges you may have to pay for the loan.
Your interest rate is used to calculate your monthly principal and interest payment. The lower the interest rate, the lower your monthly payment—assuming all other loan terms are the same.
- Shown on page 1 of the Loan Estimate under 'Loan Terms'.
- Determines the monthly principal and interest payment.
- Does not include fees or other charges.
Sources: Consumer Financial Protection Bureau
What is APR?
The annual percentage rate (APR) reflects the interest rate, any points, mortgage broker fees, and other charges that you pay to get the loan. It is a broader measure of the cost of borrowing money than the interest rate.
Because the APR includes these additional costs, it is usually higher than the interest rate. The APR is designed to help you compare the true cost of a loan from different lenders.
- Shown on page 3 of the Loan Estimate under 'Comparisons'.
- Includes points, broker fees, and other loan charges.
- Used for comparing loan offers, not for calculating your monthly payment.
Sources: Consumer Financial Protection Bureau
Key differences between APR and interest rate
The main difference is that the interest rate is just the annual cost of borrowing the principal, while the APR includes the interest rate plus certain fees and charges. Here's how they compare on the Loan Estimate:
| Feature | Interest Rate | APR |
|---|---|---|
| Definition | Cost you will pay each year to borrow the money, expressed as a percentage rate, excluding fees | The interest rate plus points, mortgage broker fees, and other charges |
| Determines monthly payment? | Yes | No |
| Where on Loan Estimate | Page 1 under 'Loan Terms' | Page 3 under 'Comparisons' |
| Usually higher or lower? | Lower than APR | Usually higher than interest rate |
Sources: Consumer Financial Protection Bureau
How to compare APR across lenders
Because the APR includes fees and other charges, it's a useful tool for comparing the overall cost of different loan offers. When you receive Loan Estimates from multiple lenders, look at the APRs to see which loan is truly less expensive over the long run.
However, you should make sure you are comparing APRs to APRs, not to interest rates. Lenders are required by the Truth in Lending Act to disclose the APR before a loan is finalized, so you can use this information in your comparison.
- Request a Loan Estimate from each lender to see their APR.
- Compare APRs that are calculated using similar assumptions.
- Be especially careful when comparing adjustable-rate mortgages (ARMs) and home equity lines of credit (HELOCs), because their APRs may be based on different assumptions.
Sources: Consumer Financial Protection Bureau
Example: How APR affects total loan cost
Consider two loan offers with the same interest rate. Lender A charges no points and no broker fees, so its APR equals the interest rate. Lender B charges one point and a broker fee, making its APR higher. Your monthly payment would be the same for both, since it's based on the interest rate, but the total cost over the full term would be higher with Lender B because of the upfront fees.
This example is for illustration only; actual APRs will vary. The key point is that the APR gives you a more complete picture of the loan's true cost than the interest rate alone.
Sources: Consumer Financial Protection Bureau
Limitations of APR
While APR is a helpful comparison tool, it has limitations. For adjustable-rate mortgages, the APR does not reflect the maximum interest rate of the loan. The APR for an ARM may be calculated using assumptions about future rate changes, which can make it less accurate than for fixed-rate loans.
Also, APRs can differ depending on how each lender calculates them, especially for loans with variable rates. When comparing offers, ask each lender for the same type of APR calculation, or at least understand the assumptions behind the numbers.
- APR does not reflect the maximum rate on an adjustable-rate mortgage.
- For ARMs and HELOCs, APRs may be based on different assumptions, making direct comparisons less reliable.
Sources: Consumer Financial Protection Bureau
APR on monthly payment and total cost
Your monthly payment is determined by the interest rate, not the APR. The APR is a broader measure that includes fees and other charges, so it does not directly affect your monthly payment. However, a higher APR generally indicates a higher total cost of borrowing over the life of the loan.
When comparing loans, consider both the interest rate (for your monthly payment) and the APR (for the overall cost). A loan with a slightly higher interest rate but much lower fees could have a lower APR and be the better deal in the long run.
Sources: Consumer Financial Protection Bureau
Frequently asked questions
Can APR be lower than the interest rate?
Generally, no. Because APR includes the interest rate plus points, broker fees, and other charges, it is usually higher than the interest rate.
Sources: Consumer Financial Protection BureauWhy do lenders quote both APR and interest rate?
Lenders quote both because they serve different purposes. The interest rate determines your monthly payment, while the APR gives a broader measure of the total cost of the loan, including fees. The Truth in Lending Act requires lenders to disclose the APR so borrowers can compare offers more easily.
Sources: Consumer Financial Protection BureauDoes a lower APR always mean a better deal?
Not necessarily. A lower APR generally means the total cost of the loan is lower, but you should also consider the interest rate, which affects your monthly payment, and the specific fees included in the APR. For adjustable-rate mortgages, the APR may not reflect the maximum possible rate, so it's important to understand the loan's terms fully.
Sources: Consumer Financial Protection BureauDo all lenders calculate APR the same way?
No. While lenders must follow the Truth in Lending Act, the calculation of APR can vary, especially for adjustable-rate mortgages and home equity lines of credit. Different assumptions about future rate changes can lead to different APRs, so it's important to compare offers that use similar assumptions.
Sources: Consumer Financial Protection BureauHow does APR affect my monthly payment?
APR does not affect your monthly payment. Your monthly payment is calculated using the interest rate, not the APR. The APR reflects the annual cost of the loan, including fees, expressed as a percentage, and is used for comparison purposes.
Sources: Consumer Financial Protection BureauSources
- Loan estimate explainer — Consumer Financial Protection Bureau
- What is the difference between a loan interest rate and the APR? — Consumer Financial Protection Bureau
- What is the Total Interest Percentage (TIP) on a mortgage? — Consumer Financial Protection Bureau
- What is the difference between a fixed-rate and adjustable-rate mortgage (ARM) loan? — Consumer Financial Protection Bureau