If you’re in the process of buying a home and securing a mortgage, you may have seen both the interest rate and annual percentage rate (APR) expressed on various websites and forms. While they’re similar, there are a few key differences — and they’re definitely not interchangeable terms. Here’s what you need to know:
- The interest rate, very simply put, is the cost of borrowing the money each year. Currently, the average interest rate for a 30-year fixed rate loan is about 3.56% according to Bankrate.
- The APR is a broader measure that takes into account the entire cost of securing a loan. In addition to the interest rate, the APR also includes the lender’s fees, points, and any other charges that you may have to pay to get the loan. Because the annual percentage rate includes these extra costs, the annual percentage rate is typically a higher amount than the interest rate.
As a consumer, it’s helpful to consider both the interest rate and APR. The interest rate will allow you to determine your monthly payment, whereas the annual percentage rate will help you to easily compare lenders.