If you're looking to buy a home or already own, you're probably familiar with the terms "Interest Rate" and "APR." They're both used when referring to mortgage rates, but why are both quoted and what makes them different?
Knowing the difference is very important and could save you thousands of dollars on your mortgage.
At the highest level:
- The interest rate is the cost of borrowing the principal loan amount.
- The APR — or Annual Percentage Rate — is a broader measure of borrowing and includes not only the interest rate but also any other costs to get a loan such as discount points, insurance and closing costs.
Quoting the APR became industry practice as part of the Truth in Lending Act, a federal law passed in 1968 to protect consumers by requiring the full disclosure of the terms and conditions of finance charges in credit transactions.
Given the same interest rate, higher APRs indicate more costs associated with obtaining a loan, including fees and points. Because of this, it's important to shop around and get APRs from several lenders, allowing you to compare all fees, apples–to–apples, and determine which lender is right for you.
If you're focused on getting the lowest monthly payment, the interest rate is likely the top priority for you. If your focus, however, is the total cost of the loan over time, the APR may be your most valuable tool.
While looking at interest rates and the APR are important, take some time to learn more about other important costs that factor in.