Knowing the difference between interest rates and annual percentage rates could save you thousands on your mortgage. Here’s what you need to know.
What is the difference between annual percentage rates (APR) and interest rates? Both rates measure important, but distinct, costs associated with your home loan, and understanding the difference between the two could save you thousands on your mortgage.
The interest rate is the cost of borrowing the principal loan amount. It can be variable or fixed, but it’s always expressed as a percentage.
The main difference between the two is that the interest rate calculates your actual monthly payment, while the APR calculates the total cost of your loan. You can use one or both to make apples-to-apples comparisons when shopping for a loan. If you’re only focused on getting the lowest monthly payment, I’d focus on the interest rate, but if you’re focused on the total cost of your loan, then you can use the APR as a tool to compare the total cost of two loans.