Interest Rate vs APR

Ever wonder why mortgage rates are quoted both in terms of interest rate and APR?

And what the difference is?

Quoting the APR became industry practice as part of the Truth in Lending Act, a Federal law passed in 1968 to protect consumers by requiring the full disclosure of the terms and conditions of finance charges in credit transactions.

The APR – or Annual Percentage Rate – includes not only the interest rate but also any other costs to get a loan such as discount points, insurance and closing costs.

For example: given the same interest rate, higher APRs indicate more costs associated with obtaining a loan. Lenders disclose these usually in the form of fees and points. While looking at the APR is an effective way to compare the total annual cost of a mortgage as you shop around, it's only one of the metrics you should look at.

Source: Freddie Mac

Key points

  • An interest rate tells you how much interest is charged on a loan
  • The annual percentage rate (APR) is the effective interest rate of a loan over the course of a year after accounting for the interest rate and extra expenses, like origination fees and points
  • When comparing loan offers, it’s best to compare APRs to get a fuller picture of the true cost of the financing
  • Interest rates — and, as a result, APRs — are influenced by factors such as inflation, the economy, market rates and your credit score