The terms Mortgage Rate and APR may seem to be the same, but they are two different things.
Mortgage rates and APR are both used to determine how much you will pay for a certain amount of money loaned throughout the loan.
It is important to know the difference between the two before getting in loan financing.
Key Takeaways
- The mortgage rate represents the interest charged on a home loan, while APR includes the mortgage rate and additional loan costs.
- APR provides a more accurate representation of the actual cost of borrowing, while the mortgage rate only reflects the interest.
- Mortgage rates can be fixed or adjustable, while APRs are disclosed as a single percentage.
Mortgage Rate vs APR
Mortgage rate is the interest rate charged by a lender on a home loan and determines the amount of interest a borrower will pay over the life of the loan. APR (Annual Percentage Rate) includes all the costs associated with the loan, representing the total cost of the loan on an annual basis.
A mortgage rate refers to the interest rate you pay on your mortgage. The mortgage rate is the interest rate used by lenders to calculate the interest to be paid by the borrower.
It is stated as an annualized percentage which means it is calculated every year and in percentages of the amount borrowed.
APR stands for the annual percentage rate. This is the annualized cost of borrowing money or another financing, expressed as a single percentage rate.
This rate is the total amount of interest that you pay, expressed as a single percentage rate, over the life of the financing.
Comparison Table
| Parameters of Comparison | Mortgage Rate | APR |
|---|---|---|
| Also Called | The mortgage rate also refers to the interest rate. | APR is the abbreviation or acronym for Annual Percentage Rate. |
| Amount | The mortgage rate is always lower than APR. | APR tends to be higher than the mortgage rate. |
| Fluctuations | The mortgage rates are subjected to market fluctuations. | APR is relatively more stable than mortgage rates. |
| Additional Fees | The mortgage rate does not give any information on any additional fees. | APR includes the rates of fees such as broker’s fees, discount points, and so on. |
| Inclusive | The mortgage rate is a narrower aspect as it just gives you an account of interest built on an amount loaned. | APR is a broader aspect and includes all aspects like prepaid interests and other additional fees. |
What is Mortgage Rate?
The term mortgage rate is a way of describing the interest rate paid by a borrower to a lender, in the form of monthly payments, for the use of the lender’s money.
Most mortgage rates are variable, and they change monthly, depending on the prime rate or other indexes.
The mortgage rate is a key component of the mortgage payment calculator. The loan amortization schedule will illustrate how the mortgage rate is a part of the original mortgage loan.
Interest rates vary depending on the borrower’s creditworthiness and the relationship between the two parties.
The rate varies depending on economic conditions, local market conditions, and the credit policy of the lender. Mortgage rates are announced publicly and vary based on floating rates, which represent the market.
Before opting for a loan, such rates can be compared online or at respective knowledge centers to find the lowest rates.
Your mortgage rate is determined by your credit score, your finances, and the current interest rate of the nation. It’s important to monitor the interest rate regularly to ensure you’re getting the best terms on your loan.
If your interest rate is too high, consider refinancing.
What APR?
APR is a term used to express how much money you’ll pay in interest each year if you take out a loan. It’s the interest rate you pay on your credit card statement. It’s also known as the annual percentage yield.
An Annual Percentage Rate is the rate of interest charged on loan over a year.
It is calculated as the amount of interest charged over the amount of the loan.
An Annual Percentage Rate is designed to give consumers an idea of what the overall cost of a loan is going to be after all the interest payments are made.
An Annual Percentage Rate is calculated for varying lengths of time and may be quoted on a nominal or effective basis.
The APR takes into account any fees, charges, and interest that were applied to your loan. This means, for example, that if someone borrows $100 and repays $110 in a year, they have had to pay $10 in interest.
The APR is always calculated using your original loan amount, not your repayments, so if you borrowed $100 for a year and pay back $110, you would have to pay back an extra $10 in interest, which would take your overall repayments to $120.
Main Differences Between Mortgage Rate and APR
- With mortgage rates, you’re also looking at how much the loan will cost you over time. With APR, you’re just looking at the interest rate that you’ll have to pay every month
- In comparison to the mortgage rates, average APR rates are higher than mortgage rates because they have more factors associated with them.
- APR is a good way to estimate how much you’ll pay for a loan over time, but mortgage rates are the most direct measure for loans.
- A mortgage rate is the actual costs that you are paying for the home or property, but they can fluctuate. APR do not.
- With mortgage rates, you’ll want to compare the costs of different lenders and interest rates so you can get the best deal. APRs cannot be compared as such as they are not released as publicly as mortgage rates.
- https://www.nber.org/papers/w20561
- https://www.jstor.org/stable/41948224
- https://search.proquest.com/openview/d33e26fb59184ce073a06c79e4e88af1/1?pq-origsite=gscholar&cbl=34822
Last Updated : 13 July, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.
It is beneficial to understand the differences between mortgage rate and APR, especially when considering a loan. This article is a good resource for clearing confusion on these financial terms.
The comparisons made here clearly illustrate why it is important to distinguish between mortgage rate and APR. The article left no room for doubt in how each factor performs.
I find it amusing that the APR is considered a good way to estimate how much you’ll pay for a loan over time, but mortgage rates are the most direct measure for loans. The article states that APR is higher because it has more factors associated with it, but fails to explain these factors.
This article was very informative and educational. Good job on explaining the differences between APR and mortgage rate. I knew the terms were not the same, but never really understood the difference well.
The terms explained in this article have very little difference. The article does not mention the practical usage of APR and mortgage rate, nor does it discuss how it impacts the borrower. Very theoretical.
This article didn’t make me laugh much. I was hoping for some humor with my education. Real letdown.