Interest Rate vs. APR - What’s the difference?

A common misperception is that your Annual Percentage Rate (APR) and interest rate are the same thing. They aren’t.

Your interest rate is what you’ll pay above the actual loan amount to the lender expressed as a percentage of the amount you’re borrowing. The APR includes your interest rate along with some of the other costs associated with the loan.

The APR is a way for you to be able to compare “apples to apples” when considering which loan offer to choose. It represents the true cost of the loan shown as a yearly rate and includes some, but not all of the fees and insurance premiums that are part of your mortgage payment.

So why include it in your Loan Estimate if it’s so confusing?

The easy answer is that it’s required by federal law to disclose both the interest rate and the APR to you as the borrower. The primary reason is so that lenders can’t “hide” their fees and upfront costs behind low advertised rates. However, the law doesn’t specify what goes into the calculation, so APR’s can vary from lender to lender and from loan to loan.

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