What Exactly Is Mortgage APR?

Mortgage interest rate and mortgage APR (annual percentage rate) while related, are not the same. You’ll see both listed for mortgages. For example, you may see a 30-year fixed-rate mortgage with an interest rate of 4.250% and an APR of 4.385%. The interest rate is the interest you pay on your home loan. The APR is the interest rate plus other fees and costs associated with buying a home. APR is really what you’ll pay on top of the principal. It’s sometimes called the percentage rate.

The federal government supports the annual percentage rate (APR) disclosure as the benchmark barometer of a loan’s cost when mortgage shoppers begin their quest to find a good deal on a home loan. For this reason, it’s important to understand what goes into a mortgage APR and to harness this knowledge to find the best loan for you.

APR Decoded

The APR you pay on your mortgage includes:

If you have a higher APR, then you can expect to make higher monthly for the term of your loan. You also want to really compare APRs and not just the flat interest rate. You want a better interest rate and APR, but the APR is really what you’ll pay, so the better the APR, the better your mortgage.

APR Versus Interest Rates

The interest rate is a percentage against the total loan amount that the mortgage lender charges each year in exchange for loaning the money the borrower.

The APR, on the other hand, is that interest, plus some other charges. With a home, those charges include the items listed above. APR is used primarily for fixed-rate mortgages.  The APR on an adjustable-rate mortgage (ARM) is a forecast only, which is often inaccurate.

Say you loan your nephew $500 to buy a new bike. In exchange, he agrees to pay you back in six months. You charge him a 5% interest rate—each month—for the favor. The interest and payments break down like this:

  • Interest Rate—5%
  • APR—0%
  • Monthly Payment—$84.55
  • Total Cost—$507.32
  • Interest Payments—$7.32

So your nephew’s interest is $7.32. That’s simply the money he’ll pay you for your loaning him the money.

Using your loan to your nephew as an example. Let’s say, you’re a tough uncle or aunt and you tell your nephew that you’re going to charge him a $20 fee on top of the interest in exchange for giving him the loan. The interest doesn’t apply to that $20 charge, but that charge is paid out over the course of the loan as part of the monthly payment rather than up front or when the loan is paid off. The payments with APR breaks down like this:

  • Interest Rate—5%
  • APR—18.6916%
  • Monthly Payment—$87.93
  • Total Cost—$527.61
  • Interest Payments —$7.61

The same scenario applies to your home loan. You pay interest and you pay APR. But what you really pay is the APR, which includes the interest and is your total cost of borrowing.

Keep in mind that there are charges that don’t go into the APR category, such as closing costs, which aren’t included in APR.

How APR Affects Your Mortgage

The APR helps you evaluate the true cost of borrowing the money for buying your home. It actually also helps you spread the costs of that purchase out.

Let’s look at your nephew again. Say, he buys at the bike under the 18.6916% APR scenario. He decides after two months to sell it. At that point. He’s paid you $175.86 toward the loan, $6.76 of which covers the $20 fee you’re charging him for the loan. He sells the bike for $400. He pays you the remaining principal left on the loan, which is $334.72. But, because he spread the $20 fee out over the life of the loans, he’s actually saving $13.24 compared to if he had paid that and upfront $20 fee.

The moral of the story is that APR helps spread costs out across your monthly mortgage payments for the long haul and it benefits you if you if you end up selling your home earlier. You could pay less interest if you paid all the fees associated for the loan up front, but if you need to sell early, you lose money.

Knowing the APR lets you measure how much interest you end up paying in the long run. It also lets you compare loan products and fees to see how you can save money over the term of your loan.

APR Tips and Tidbits

APR is disclosed for a new loan or credit products. You won’t, however, see APR on your monthly mortgage loan statement as the APR is used as a cost measure when you first apply.  The sole purpose of APR disclosure is to make mortgage shopping easier. The APR doesn’t change the amount you borrow.

A loan calculator, or amortization schedule calculator, offers a simple way to estimate your monthly loan payments. It also shows how much of each of your payments go to the interest of the mortgage loan as well as the principal (the actual amount you borrowed).

Be attentive if the APR is more than 0.25% higher than the interest rate for a loan. If you receive disclosures that show a substantially higher APR than the interest rate and you don’t understand the disparity between the ARP on your disclosures and/or mortgage quote versus the interest rate, ask your loan officer. Don’t be afraid to ask questions even if they seem silly or redundant.

Keep in mind that one of the biggest factors in what determines the interest rate you end up paying is your credit score. Taking some time before applying for a mortgage to build a good credit score can save you thousands over the life of your loan from a lower interest rate. You can check your credit score for free on Credit.com to see where you stand and use the free credit report card that comes with your score to improve your score over time.

Ready to Shop for a Mortgage Rate?

You can browse and compare home loan rates and terms right here on Credit.com.

More on Mortgages and Homebuying

This article was last published May 20, 2015, and has since been updated by another author.

Credit.com receives compensation for the financial products and services advertised on this site if our users apply for and sign up for any of them. Compensation is not a factor in the substantive evaluation of any product.

Hello, Reader!

Thanks for checking out Credit.com. We hope you find the site and the journalism we produce useful. We wanted to take some time to tell you a bit about ourselves.

Our People

The Credit.com editorial team is staffed by a team of editors and reporters, each with many years of financial reporting experience. We’ve worked for places like the New York Times, American Banker, Frontline, TheStreet.com, Business Insider, ABC News, NBC News, CNBC and many others. We also employ a few freelancers and more than 50 contributors (these are typically subject matter experts from the worlds of finance, academia, politics, business and elsewhere).

Our Reporting

We take great pains to ensure that the articles, video and graphics you see on Credit.com are thoroughly reported and fact-checked. Each story is read by two separate editors, and we adhere to the highest editorial standards. We’re not perfect, however, and if you see something that you think is wrong, please email us at editorial team [at] credit [dot] com,

The Credit.com editorial team is committed to providing our readers and viewers with sound, well-reported and understandable information designed to inform and empower. We won’t tell you what to do. We will, however, do our best to explain the consequences of various actions, thereby arming you with the information you need to make decisions that are in your best interests. We also write about things relating to money and finance we think are interesting and want to share.

In addition to appearing on Credit.com, our articles are syndicated to dozens of other news sites. We have more than 100 partners, including MSN, ABC News, CBS News, Yahoo, Marketwatch, Scripps, Money Magazine and many others. This network operates similarly to the Associated Press or Reuters, except we focus almost exclusively on issues relating to personal finance. These are not advertorial or paid placements, rather we provide these articles to our partners in most cases for free. These relationships create more awareness of Credit.com in general and they result in more traffic to us as well.

Our Business Model

Credit.com’s journalism is largely supported by an e-commerce business model. Rather than rely on revenue from display ad impressions, Credit.com maintains a financial marketplace separate from its editorial pages. When someone navigates to those pages, and applies for a credit card, for example, Credit.com will get paid what is essentially a finder’s fee if that person ends up getting the card. That doesn’t mean, however, that our editorial decisions are informed by the products available in our marketplace. The editorial team chooses what to write about and how to write about it independently of the decisions and priorities of the business side of the company. In fact, we maintain a strict and important firewall between the editorial and business departments. Our mission as journalists is to serve the reader, not the advertiser. In that sense, we are no different from any other news organization that is supported by ad revenue.

Visitors to Credit.com are also able to register for a free Credit.com account, which gives them access to a tool called The Credit Report Card. This tool provides users with two free credit scores and a breakdown of the information in their Experian credit report, updated twice monthly. Again, this tool is entirely free, and we mention that frequently in our articles, because we think that it’s a good thing for users to have access to data like this. Separate from its educational value, there is also a business angle to the Credit Report Card. Registered users can be matched with products and services for which they are most likely to qualify. In other words, if you register and you find that your credit is less than stellar, Credit.com won’t recommend a high-end platinum credit card that requires an excellent credit score You’d likely get rejected, and that’s no good for you or Credit.com. You’d be no closer to getting a product you need, there’d be a wasted inquiry on your credit report, and Credit.com wouldn’t get paid. These are essentially what are commonly referred to as "targeted ads" in the world of the Internet. Despite all of this, however, even if you never apply for any product, the Credit Report Card will remain free, and none of this will impact how the editorial team reports on credit and credit scores.

Your Stories

Lastly, much of what we do is informed by our own experiences as well as the experiences of our readers. We want to tell your stories if you’re interested in sharing them. Please email us at story ideas [at] credit [dot] com with ideas or visit us on Facebook or Twitter.

Thanks for stopping by.

- The Credit.com Editorial Team