Understanding the Difference Between Interest Rate and APR

One of the least understood aspects of obtaining a home loan is the
difference between the interest rate and the APR (Annual Percentage
Rate). At first glance, they sound like the same thing, but while they both
impact the cost of the loan, they are two different aspects of the home loan program.  Home interest rates, or more commonly referred to as mortgage rates, are
the actual cost of borrowing the money needed to buy the home. Lenders
use the borrower’s credit score, income, loan amount, and other factors to
determine their risk of lending the money. Then, they determine how much
interest to charge on the principal loan amount.
On the other hand, APR provides an overall picture of the total cost of
borrowing. It includes not only the interest rate cost, but also other costs
and fees associated with the loan. Items such as origination fees, points,
and mortgage insurance are all added to the total interest due over the
course of the loan and then compared to the amount borrowed to
determine the Annual Percentage Rate.
For potential borrowers, the APR allows them to compare the total cost of
the loan among all available loans. One might offer a lower interest rate but
once the fees and costs are included, it may end up costing more in the
long run.
Mortgage financing can seem complicated and confusing but by learning
the terms and how they affect the loan, borrowers can make informed
decisions about what loan program makes sense for their needs.