Interest Rate vs. APR: What’s the Difference?

When shopping for a new home loan, it’s easy to feel overwhelmed by the terminology that lenders and realtors use to describe various aspects of lending:  PITI, conforming/non-conforming, jumbo, conventional/nonconventional, ARM…  I often tell clients, when in doubt, ask your lender to explain anything and everything to you.  There are no dumb questions in real estate (and in life).

However, a frequent question I come across is what is the difference between an interest rate and an APR (annual percentage rate)? The answer is rather straightforward.

An interest rate is the cost you will pay each year to borrow money from your lender, expressed as a percentage of the loan amount. It does not reflect fees or any other charges you may have to pay for the loan.

An annual percentage rate (APR) is broader than an interest rate — it measures the cost to you of borrowing money, and includes not only the interest rate but also any points, mortgage broker fees, and other charges that you pay to get the loan. For that reason, your APR is usually higher than your interest rate.

So when shopping for a home loan, don’t forget to ask about not only the interest rate, but also the APR.  Both figures should be included in your lender’s Loan Estimate.

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