The interest rate and Annual Percentage Rate (APR) are related, but they measure different things.
Interest Rate
The mortgage interest rate is used to calculate interest charged on the loan and is a primary factor in the principal-and-interest payment.
Annual Percentage Rate (APR)
APR is a broader measure of the cost of credit. It incorporates the interest rate plus certain finance charges such as some points, broker fees, and other loan costs.
Why Both Matter
A borrower may see a 6.50% interest rate and a higher APR. That does not mean payments are calculated using the APR. APR is a comparison measure intended to reflect more of the borrowing cost.
Compare the Whole Loan
- Interest rate
- Discount points
- Lender credits
- Origination charges
- Mortgage insurance
- Cash required at closing
- Monthly payment
- Loan type
- Fixed or adjustable structure
- Expected time in the mortgage
Homebuyer takeaway: Interest rate helps determine payment. APR helps describe a broader cost of obtaining the credit.
Sources
CFPB: Interest Rate vs. APR
CFPB Regulation Z, Section 1026.22