Mortgage Rate vs APR: Key Choices & Consideration

Published on December 20, 2016

– 5 min read

Understanding the difference between interest rate and APR, as well as key choices that can affect your interest rate, can help set you up for success.

Mortgage Rate vs APR

When a lender quotes you an interest rate, they will also provide an annual percentage rate, or APR. These numbers are related, but they have a key difference: the APR for a (home) loan considers the total cost of the loan.

Whereas the interest rate only considers the costs of borrowing money, the APR considers the interest rate as well as the fees and charges associated with the loan. The APR is a broader measure of cost, which allows you to more easily compare loans when shopping among different lenders.

Imagine you have two loan quotes, and the lenders have identical interest rates. The loans may look the same on paper, but if one lender charges $5,000 for closing costs, and the other lender charges $7,500, this difference will be reflected in the APR.

This seems straightforward when the interest rates for a loan quote are identical. But what happens when one lender’s interest rate is slightly higher than the others? Or what if a lender wants to present an artificially low interest rate for marketing purposes, but tacks on inflated closing costs?

It can be hard to compare quotes when they are not an apples-to-apples comparison. Regulators require lenders to present the APR in addition to the interest rate as a way to promote transparency.

Choices that Affect Your Interest Rate

There are also a couple of decisions you can make during the loan process that will affect your interest rate. Luckily, these are within your control, and exist for your benefit.

Rolling Closing Costs into the Loan

For borrowers who want to conserve cash, there are a few options.

You can choose to include your closing costs into your loan amount. By “rolling” your closing costs into your loan, the cash required at closing would decrease, and your loan amount would increase accordingly.

You can also choose to take a higher interest rate for your loan, and the lender will reduce your closing costs accordingly.

Some lenders refer to these scenarios as “no cost” loans. In both cases, you’re agreeing to a higher monthly payment in exchange for a reduced amount of cash required at closing.

Buying Down Points

This is basically the opposite of a no cost loan. If you pay the lender cash up front, they will gladly lower your interest rate.

This is a great option for someone with a large cash reserve who is more concerned with lowering their monthly payments. This can also be great for someone who plans to stay in the home for a long time. Lowering your rate up front can save you thousands upon thousands of dollars over the lifetime of the loan.

To learn more about interest rates, check out, “Mortgage Interest Rates: How Are They Determined.” You can also chat with one of our licensed Loan Specialists. If you’re ready to see your personalized rates, you can do so completely online in about 3 minutes.

Andrew Kilburn
Andrew Kilburn is a licensed Loan Specialist at Clara. He likes to live an active lifestyle outside the office, where you’ll find him sailing with his wife and 3-year-old, hiking around the Bay Area, doing yoga, or rock climbing.
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