Difference Between Similar Terms and Objects

Differences Between Mortgage Rate and APR

Selecting the right mortgage rate is critical and can help in saving huge chunks of money. One needs to choose the rate that can comfortably be added to their monthly house expenses. One important thing you need to know while shopping for mortgages is how to effectively compare the mortgage rate and the APR which is the annual percentage rate.

What is Mortgage Rate?

The mortgage rate is an interest rate applied to your loan amount to calculate amount of interest owed to the lender monthly. This rate could be fixed or adjustable based on the type of mortgage taken.

The fixed rate does not change with time; however, the adjustable rate can be altered by the lender within the lifespan of the loan taken. The adjustable rate is referred to as (ARM) adjustable rate mortgage which means the rate can either increase or decrease based on certain circumstances.

There are caps that regulate the changes that lenders can make. Most ARM’S have fixed rates for a couple of years then which then later change to adjustable rates.

Mortgages comprise of the principal amount and an interest rate. The interest rate is a % fee charged, while the principal is the borrowed amount. Paying off the interest reduces the principal amount. The rates are determined within the following criteria:

  • Amount of money to be borrowed
  • Amount of savings
  • Years to repay the loan
  • Type of loan you choose
  • Efficiency in bill payments

When one applies for a loan the rates charged can also be either floating or locked. The floating rate means it can be changed before the loan is approved, this is dependent on the market forces that affect interest rate.

The locked rate can be applied for in sets of 30, 45 and 60 days, it locks a certain interest rate down, which can’t change regardless of market forces. One can pay an additional fee once the days lapse before the loan approval process is complete.


What is APR (Annual Percentage Rate)?

APR which is the Annual Percentage Rate refers to the total interest rate from the mortgage loan and additional fees incurred in acquiring the loan. Mostly it includes both the lender’s and appraisal fees, but, at times the lender’s fees are calculated in the APR and at other times the appraisal fee isn’t. This charge is paid yearly and takes into account all the following:

  • credit card charges
  • prepaid interest rates
  • settlement fees
  • the origination fees
  • closing fees
  • mortgage insurance premium

In simple terms, it means the total cost of borrowing in a year. It is a great tool for comparing the financial products available as it is more comprehensive than the interest rate. It is a true indicator of the loan total cost. It is termed as a great guiding factor for borrowing. However, when making comparisons between financial products, compare interests to interests and APR’s to APR’s.

Differences between Mortgage rate and APR

  1. Definition of Mortgage rate and APR

The Mortgage rate is the rate which the interest is charged on a loan issued by the lender. The APR is the yearly total cost of borrowing includes the interest rates and other fees.

  1. What is it?

Mortgage rate is the fee charged on the borrowed capital. APR is an effective rate that can make comparisons between different loans.

  1. Time of Mortgage rate and APR

The mortgage rate is paid monthly, while the APR paid yearly. The total mortgage rate is calculated yearly then divided by 12 to get the monthly installments. Both are however calculated in yearly terms, initially.

  1. Use of Mortgage rate and APR

APR can be used to compare costs of different loans effectively. This is because it gives a better picture of the total expenses incurred. Mortgage interest rate is only a fee charged monthly on a borrowed amount.

  1. Size

The mortgage rate is usually less than the APR. this is because the APR contains both the interest rate, mortgage closing fees and additional fees incurred during the borrowing process.

  1. Flexibility in Mortgage rate and APR

The APR changes when one sells or refinances. This is because different processes incur different costs and fees. The mortgage rate remains the same if the rate is the fixed type.

Mortgage Rate vs. APR: Comparison chart

Summary of Mortgage rate and APR

  • The mortgage and the APR are both rates used by banks to calculate charges that apply to borrowing.
  • Mortgage rate is the interest rate charged on a principal amount borrowed. The APR is a rate that comprises of the interest to be charged and additional fees such as credit card charges, settlement fees, closing fees and so much more.
  • The mortgage rate and the APR differ in that the first is less than the later.
  • The mortgage interest rate is paid monthly but the APR is a yearly rate.
  • The APR changes when the individual refinances or dells, however the fixed mortgage rate remains constant during refinancing or selling.

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1 Comment

  1. Thank you Evah for posting this information. I found it very helpful and simple to understand. I also appreciate you citing your sources in the end.

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References :

[0]Charupat, N., Huang, H., & Milevsky, M. A. (2012). Strategic Financial Planning over the Lifecycle: A Conceptual Approach to Personal Risk Management. Cambridge University Press.

[1]Hancock, D. (2011). Did the Federal Reserve’s MBS Purchase Program Lower Mortgage Rates? DIANE Publishing.

[2]Hodson, M. (2003). Save Thousands Buying Your Home: A Step-By-Step Guide to Reducing the Price of a House and the Cost of Your Mortgage. How To Books Ltd.

[3]Image credit: https://en.wikipedia.org/wiki/Flat_rate_(finance)#/media/File:Flat_Interest_APR.jpg

[4]Image credit: https://www.flickr.com/photos/119599301@N02/14037125672

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