What is the difference between rate and apr for mortgage

If you’re shopping for a mortgage, the annual percentage rate (APR) is a good way to compare our mortgage rates against other mortgage lenders.

Interest rate vs. APR – what’s the difference?

You’ll see these 2 terms when you start comparing mortgage rates. While both are expressed as percentages, they have some key differences.

 First-time homebuyers 

You can lower your interest rate with mortgage points (discount points)

Discount points or mortgage points are a way you can lower your interest rate. They’re prepaid interest costs you or a seller can pay at closing to permanently lower the interest rate.

Here's how discount points work

One discount point costs 1% of your loan amount. While one point will typically reduce the interest rate by less than 1%, even a small interest rate reduction can lower your monthly payment and the amount of interest you pay over the life of a fixed-rate loan. Discount points may also be tax deductible (talk to a tax advisor for details).

Before buying discount points, consider:

• How much money you can pay upfront - make sure you have enough money to make a down payment, pay closing costs, and still be able to manage other expenses for your new home.
• How long you plan to stay in your new home - the longer you stay in your home, the more you may be able to benefit from buying discount points.
• How much can you pay each month - if you don’t have a lot of money to pay upfront and can handle a slightly larger monthly payment, you might be better off not buying points.

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A loan's Annual Percentage Rate, or APR, is the cost of your mortgage credit as a yearly rate.

Your Annual Percentage Rate is typically higher than your interest rate because it includes your interest rate plus certain fees, such as lender and mortgage broker fees, based on the specific characteristics of your loan.

The interest rate shows what percentage of your loan amount you will need to pay every year, over the life of your loan.

One type of fee often included in the APR is discount points.

Discount points are up-front charges paid to the lender voluntarily, usually by the borrower or seller, to reduce the interest rate. One point is equal to 1% of the principal amount of the mortgage.

Paying discount points can be advantageous if you have an extended loan term and you plan to stay in your new home for a while.

Applying for a loan isn't free. Another fee included in the APR is the amount the lender charges to process the loan application.

You'll hear this charge referred to as the "origination charge" and it includes any application, processing, and underwriting fees. These fees and charges vary. Typically the buyer pays the majority of the origination charge, but you can negotiate with the seller in your offer.

Lenders will approximate all the expected fees and charges in a disclosure document called the Loan Estimate, which estimates the total cost of the transaction.

As you can see, many variables can affect the cost of a loan, and it is important to look at not only the monthly amount you will pay, but the overall amount as well.

Wells Fargo Home Mortgage is a division of Wells Fargo Bank, N.A. 
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Marcie Geffner is a personal finance writer and has written for PNC Bank, Key Bank, BMO Bank, J.P. Morgan, Peoples Bank, Union Bank, LoanDepot, LendingTree and American Express. Editorial Note: Credit Karma receives compensation from third-party advertisers, but that doesn’t affect our editors’ opinions. Our third-party advertisers don’t review, approve or endorse our editorial content. It’s accurate to the best of our knowledge when posted.

Choosing the right mortgage can help you save money and feel more comfortable with your monthly housing expense.

One thing you’ll need to know when you shop for a mortgage is how to compare a mortgage interest rate and an annual percentage rate.

• What are mortgage interest rates and APRs?
• Understanding mortgage interest rates
• Understanding APRs
• How to compare mortgage interest rates and APRs

What are mortgage interest rates and APRs?

A mortgage interest rate is a small percentage that’s applied to your loan balance to determine how much interest you owe your lender each month. When you begin to repay your loan, your rate will be used to calculate the interest portion of your monthly payment.

For example, if you owe $100,000 and your interest rate is 5%, your annual interest expense will be $5,000, and you’ll pay a portion of that every month as part of your mortgage payment. While the calculations are actually more complicated than that, this example helps explain the general concept.

An APR is also a percentage, but it also includes all the costs of financing, including the fees and charges that you have to pay to get the loan. The APR for a given loan is typically higher than the mortgage interest rate. An APR is never used to calculate your monthly payment.

Understanding mortgage interest rates

A mortgage payment is made up of the principal and the interest. The principal is the money you borrowed from your lender. The interest is a percentage-based fee that you pay the lender for borrowing that money. Paying the principal reduces the amount you owe, while paying the interest does not.

Rates can be fixed or adjustable. A fixed rate never changes, but the rate for an adjustable rate mortgage, or ARM, can adjust higher or lower (based on an index) while you have your loan. If your rate adjusts, your monthly payment will change. Adjustable rate mortgages typically have caps that limit how much and how often they can change. Most adjustable rate mortgages have a rate that’s fixed for a number of years and then can adjust.

Lenders offer different rates to different borrowers. The rates you’ll be offered typically depend on the following:

• How much you want to borrow.
• How much you’ve saved to pay upfront.
• How many years you’ll have to repay your loan.
• Whether you usually pay your bills on time.
• The type of loan you choose.
• Where you live.

When you apply for a loan, the rates you’re offered can be either floating or locked. A floating rate can change before you close your loan. A locked rate shouldn’t change for 30, 45 or 60 days, depending on how long your rate lock lasts. If you won’t be able to find a home and complete the loan process in that time frame, you can usually pay a fee to get a longer lock.

Understanding APRs

An APR includes both the mortgage interest rate you pay for the loan as well as some of the fees the lender charges you to get the loan. There could also be other costs that you’d have to pay that aren’t included in the APR. Which costs are included depends on how the lender calculates APR. For example, the lender’s fees usually are included, but the appraisal fee usually isn’t.

An APR can be used as a “guiding point” to understand the costs associated with a fixed-rate loan, but it’s not the only factor that’s important, says Jim Sahnger, a mortgage planner at Schaffer Mortgage Corp. in Palm Beach Gardens, Florida.

“People should pay attention to APR, but they should also pay attention to the total cost associated with getting the mortgage,” Sahnger says.

How to compare mortgage interest rates and APRs

When you review your loan estimates and evaluate your options, remember not to compare a mortgage rate to an APR because that’s not an apples-to-apples comparison. Instead, always compare rates to rates and APRs to APRs.

It’s important to compare rates because the interest you pay is a big part of your monthly payment. With a lower rate, you’ll pay less interest over the life of the loan.

It’s important to compare APRs because interest isn’t the only cost you’ll pay for your loan.

APRs are more useful to compare for fixed-rate loans than they are for variable-rate loans. This is because variable-rate APRs are partly based on assumptions about future rate adjustments. Because the adjustments are not certain, a variable-rate APR might not include the loan’s highest possible rate.

Never compare an APR for a loan with mortgage insurance to an APR for a loan without mortgage insurance. Mortgage insurance protects your lender if you don’t repay your loan. You may have to pay for it if your down payment isn’t at least 20% of your home’s purchase price.

A loan with mortgage insurance will have a higher APR than the same loan without mortgage insurance because the insurance is a cost that’s included in APR.

Bottom line

When shopping for a mortgage, look at not only the interest rate and APR, but also the other costs of the loan that aren’t included in APR. Ask your lender how it calculates APR and what costs are included, and read the information you receive from the lender.

About the author: Marcie Geffner is an award-winning freelance reporter, editor, writer and book critic. Her work has been featured online and in print by the Chicago Sun-Times, Fox Business Network Online, Los Angeles Times, The Washi… Read more.

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