APR vs Interest Rate: What's the Difference and Why It Matters

When shopping for a mortgage, you'll see two numbers: the interest rate and the APR. Understanding the difference can save you thousands of dollars.

Interest Rate: The Simple Cost

The interest rate is the percentage you pay to borrow money. If you borrow $300,000 at 6.5%, you'll pay $6.5% interest annually on your loan balance.

APR: The True Cost

APR (Annual Percentage Rate) includes the interest rate PLUS additional costs like origination fees, discount points, and mortgage insurance. It gives you the true cost of the loan.

Example

  • Interest Rate: 6.5%
  • Loan Amount: $300,000
  • Fees: $5,000 in origination fees and points
  • APR: 6.75% (includes fees spread over loan term)

Why APR Matters

Two lenders might offer the same interest rate, but different APRs. The lender with the lower APR has lower fees and is the better deal.

When Comparing Offers

Always compare APR to APR, not just interest rates. A 6.5% rate with 2 points might have a higher APR than a 6.75% rate with no points.

Use our rate comparison tool to see both interest rates and APRs from Massachusetts credit unions.

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