What Is APR and How Is It Different From the Mortgage Interest Rate?

Two Numbers That Tell Different Stories

When comparing mortgage offers from different San Diego lenders, you will see two rates: the interest rate and the Annual Percentage Rate. Understanding the difference — and which one to use for comparison — can save you thousands of dollars in your home purchase.

What Is the Interest Rate?

The interest rate is the basic cost of borrowing expressed as a percentage of the loan balance. It determines your monthly principal and interest payment. Two loans with the same interest rate will produce the same monthly payment regardless of fees.

What Is the APR?

The APR includes the interest rate plus other costs of the loan — origination fees, discount points, mortgage broker fees, and certain other upfront costs. It spreads these fees over the life of the loan and expresses the total cost as an annualized rate. The APR is always equal to or higher than the interest rate.

When to Use APR for Comparison

Use APR to compare loans you intend to keep for a long time — close to or through the full term. The APR accurately reflects the total cost for long-term borrowers. If you plan to sell or refinance within 5 to 7 years, calculate the actual dollar cost of fees rather than relying solely on APR, as it may overstate the relevance of upfront costs.

What APR Does Not Include

APR does not include homeowner's insurance, property taxes, PMI, or home warranty costs — all of which affect your total monthly payment. When evaluating affordability, your lender's Loan Estimate shows your full estimated monthly payment including principal, interest, taxes, insurance, and any mortgage insurance required.

Related Reading on RiederHomes.com:

→ Blog #7: Understanding Interest Rates

→ Blog #8: Rate Lock Strategy

→ Blog #2: Mortgage Pre-Approval

→ Blog #6: Buyer Closing Costs

— Mance Rieder, Broker Associate | Rieder Homes Group | REAL Broker | riederhomes.com | 858-295-0556