Homebuying 101: Interest rate vs. APR

Home Buying

When you’re shopping for a home loan, you’re quoted two different rates. One is the interest rate and the other is the annual percentage rate (APR). Both are represented as a percentage and describe the cost of the loan. However, they describe the cost of the loan in different ways.  

The interest rate is the amount a lender charges to borrow the principal loan amount. A borrower will pay back the principal loan amount plus the interest charged on it. The interest rate is determined by current rates and the borrower’s credit profile.

The APR includes the cost of the interest rate plus any broker or lender fees, closing costs, discount points, or rebates. This cost is also expressed as a percentage and should be greater or equal to the interest rate. This number is influenced by the lender as it includes fees which may vary between companies.

Lenders use these two numbers as a way for customers to compare loan options and make an educated decision on the overall cost of a home loan.

When deciding on your home financing, it can be helpful to compare the interest rate and APR of each option. A higher interest rate could mean you’ll pay more over the life of the loan. If comparing between loan options with the same interest rate, a lower APR will reflect fewer upfront fees.

Other factors, such as how long you plan to occupy the home or if you have an adjustable rate mortgage (ARM), can also affect the overall cost of your home loan. For example, if you have an ARM, the interest rate may change in a few years and alter your APR. A trusted mortgage professional will work with you so that you understand the loan process and terminology. This will help you make an informed decision on which home financing option best fits your goals and needs.

Interested in getting started on your homebuying journey? Contact an Evergreen loan officer near you.

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