Difference between Home Loan APR and Mortgage Rate: A Guide for Co-parents and Divorcing Couples
Staff Contributor
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The APR (Annual Percentage Rate) and the Mortgage Rate are both key figures in understanding the cost of borrowing money for a home loan. However, they represent different things and serve different purposes. Here's a breakdown:
1. Mortgage Rate (or Interest Rate):
- Definition: The mortgage rate is the base percentage charged by the lender for borrowing the principal loan amount.
- What it Includes: Only the interest on the loan principal.
- Purpose: Reflects the cost of borrowing money without considering additional fees or costs.
- Impact: Determines the amount of interest you pay monthly on your loan.
- Typical Representation: Expressed as a simple annual percentage (e.g., 6.5%).
- Example Use: A 6.5% mortgage rate on a $200,000 loan means the annual interest is $13,000 (6.5% of $200,000).
2. Annual Percentage Rate (APR):
- Definition: APR reflects the total cost of the loan, including the interest rate and other costs like fees, points, and closing costs.
- What it Includes:
- Interest rate
- Origination fees
- Discount points
- Mortgage insurance (if applicable)
- Other fees (e.g., underwriting, processing, etc.)
- Purpose: Provides a more comprehensive view of the loan's cost over time, enabling better comparison of loan offers.
- Impact: Gives borrowers a clearer understanding of the loan's true cost.
- Typical Representation: Expressed as a higher percentage than the interest rate (e.g., 6.75% APR for a 6.5% mortgage rate).
- Example Use: If Loan A has a 6.5% rate and Loan B has a 6.6% rate, but Loan A has higher fees, the APR might reveal Loan B is actually cheaper overall.
Key Differences:
| Aspect |
Mortgage Rate |
APR |
| Includes Fees? |
No |
Yes |
| Reflects True Cost? |
Partially |
Yes |
| Purpose |
Shows cost of borrowing |
Helps compare overall loan costs |
| Influences Monthly Payment? |
Yes |
No |
Why the Difference Matters
- Comparing Lenders: APR helps you compare loans with different fee structures. A lower mortgage rate doesn’t always mean a cheaper loan if the fees are higher.
- Understanding Costs: The mortgage rate determines your monthly payment, while APR shows the long-term cost of the loan.
Example:
For a $200,000 loan:
- Loan 1: 6.5% mortgage rate with $5,000 in fees → APR: 6.75%
- Loan 2: 6.6% mortgage rate with $2,000 in fees → APR: 6.68%
In this case, Loan 2 is cheaper overall, even though it has a slightly higher mortgage rate.
Warning:
This post is neither financial, health, legal, or personal advice nor a substitute for the advice offered by a professional. These are serious matters, and the help of a professional is recommended as it can impact your future.
