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Mortgage Basics

Interest Rate vs. Annual Percentage Rate

October 09, 2017

Interest Rate – “the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of assets.”

Annual Percentage Rate (APR) – “the annual rate charged for borrowing or earned through an investment, expressed as a percentage that represents the actual yearly cost of funds over the team of a loan.”

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Is it just us, or do those terms sound really similar? Not only that, but they also sound really confusing. Believe it or not, there’s a difference. And they’re not so complicated! These terms may be unclear to you, despite hearing them over and over again when you’re shopping for a home.

Here’s the difference: an interest rate is an expense you pay each month – in addition to your normal mortgage payment – to the lender for letting you use their money.

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An APR, more broadly, measures the entire cost of your mortgage. The APR is calculated by taking your average annual costs (interest, fees, etc.) divided by your mortgage loan amount. If you’re wondering what your APR is, a Waterstone Mortgage loan professional can help explain these terms in much more detail.