The difference between APR and interest rate—often just a few basis points (BPS)—can significantly affect your loan’s total cost. While the interest rate impacts your monthly payment, APR includes lender fees, difference between APR and interest rate using BPS giving a fuller picture of what you’ll pay over time. Comparing loans using APR in BPS terms helps homebuyers identify the true long-term cost, making it crucial to evaluate both rates before choosing a mortgage.
What Is the Interest Rate?
The interest rate is the basic cost of borrowing money, expressed as a percentage. It reflects what the lender charges for the loan amount, excluding any additional fees or costs.
It directly affects your monthly mortgage payment. The lower the interest rate, the less you pay each month.
Example:
Say you’re borrowing $300,000 with a 30-year fixed-rate loan at 6.5% interest.
Your monthly principal and interest payment would be:
$1,896 (not including taxes or insurance)
What Is APR (Annual Percentage Rate)?
The APR gives you a broader picture. It includes the interest rate PLUS lender fees such as:
- Loan origination fees
- Discount points
- Broker fees
- Some closing costs
This percentage reflects the true annual cost of borrowing and is helpful for comparing loan offers with different fee structures.
Example:
Let’s say that same $300,000 loan at 6.5% interest includes $6,000 in fees. Over a 30-year term, the APR might be 6.78%.
APR tells you:
- How much the loan costs annually when fees are included.
- A better way to compare total loan cost between lenders.
Quick facts about APR:
- Reflects total cost of financing.
- Includes interest + fees.
- Helps compare loan options apples-to-apples.
APR vs. Interest Rate: At a Glance
Feature |
Interest Rate |
APR (Annual Percentage Rate) |
| Includes lender fees? | ❌ No | ✅ Yes |
| Used to calculate monthly payments? | ✅ Yes | ❌ No |
| Shows true cost of the loan? | ❌ No | ✅ Yes |
| Ideal for comparing lenders? | ❌ Limited | ✅ Best |
| Lower always better? | ✅ Usually | ✅ Usually |
Real-World Comparison Example
Let’s say two lenders offer you similar loan terms on a $300,000 mortgage. Here’s how the offers might compare:
What This Means:
- Lender A has a lower monthly payment but higher fees.
- Lender B has no fees, but a slightly higher monthly payment.
If you plan to stay in the home for a long time, Lender A’s lower monthly payments may save you money. But if you plan to move or refinance within a few years, Lender B might be the smarter option.
When Should You Focus on APR vs. Interest Rate?
Use this guide based on your homeownership goals:
If you plan to stay long-term (10+ years):
- Focus on APR—you’ll benefit more from long-term cost savings.
If you’re staying short-term or refinancing:
- Focus on interest rate and upfront fees—you want low initial costs.
When comparing lenders:
- Always compare APRs on the same loan type and term.
Common Misconceptions
“A lower interest rate always means a better deal.”
Not necessarily! That rate may come with high fees that inflate the APR.
“APR affects your monthly payment.”
APR is not used to calculate your monthly principal and interest. That’s based on the interest rate alone.
“You don’t need to look at both numbers.”
You do. Both tell different sides of the story.
Actionable Tips for Comparing Mortgage Offers
Here’s how to make smart decisions as you shop around:
1. Get Loan Estimates From Multiple Lenders
Ask for the official Loan Estimate (LE)—a standardized document that shows both interest rate and APR.
2. Use an APR Comparison Calculator
Use tools like:
- Consumer Finance APR Calculator
- Bankrate Mortgage Comparison Tool
3. Ask About Fee Breakdowns
Know what fees are included in the APR. Some lenders include more than others.
4. Consider Discount Points
If you’re offered the option to buy points to lower your interest rate, calculate how long it’ll take to break even.
5. Think About Your Timeline
If you’re moving in 3 years, a higher APR with lower monthly payments might not make sense.
Pro Tip for Real Estate Professionals
Help your clients look beyond the shiny headline rate. Guide them through comparing APRs and encourage them to ask:
- What’s included in this APR?
- What’s the breakeven point on this rate vs. fee trade-off?
Position yourself as a trusted advisor—not just a property expert, but a financial partner in the journey.
FAQs
1. Why is the APR always higher than the interest rate?
Because it includes extra costs like fees, points, and other loan charges.
2. Can APR ever be the same as the interest rate?
Yes—if there are no fees or added costs associated with the loan.
3. Is APR more important than interest rate?
It depends. For long-term cost analysis, yes. But for short-term affordability, focus on the interest rate.
4. Should I always choose the lowest APR?
Not always. It depends on how long you plan to keep the loan. Higher upfront fees might not be worth it for short stays.
5. How do I find the break-even point between two offers?
Use a break-even calculator or divide the cost difference by monthly savings to see how many months it takes to recover fees.
Final Thoughts
When choosing a mortgage, don’t fall for the lowest interest rate at first glance. The interest rate tells you what you’ll pay each month. The APR tells you what you’ll pay in total. Smart buyers compare both—and weigh them against personal goals like how long you’ll keep the home and how much you can afford upfront. Use online calculators, consult your loan officer, and always ask for a Loan Estimate to make an informed decision.