Mortgage Interest Rate vs. APR vs. APY Explained

Learn the Difference Between Common Financial Terms

When buying a home, calculating the mortgage interest rate is key to finding what fits your budget. But it’s easy to get confused when comparing mortgage interest rates to annual percentage rates (APR), or other financial terms such as annual percentage yield (APY). Learn what these terms mean and how they impact your homebuying budget.

Interest Rate, APR, and APY Definitions

While understanding rates may seem complicated, these terms don’t have to be overwhelming.

Mortgage Rate: The Base (Nominal) Interest Charged by the Lender

Mortgage rates are the cost of borrowing money from a lender, charged through interest. The exact percentage depends on the cost of the home as well as other economic factors such as inflation and the Federal Funds Rate. This only covers the cost of the home, not closing costs, origination fees, or other expenses. The rate is either a fixed-rate or an adjustable-rate mortgage (ARM).

Fixed mortgage rates will have the same interest rate for the loan duration. For example, if you took out a 6% fixed-rate mortgage for a $255,000 loan, you’d keep that rate until your home is entirely paid off. Meanwhile, an ARM starts at a lower rate, but after a set amount of time, could change to reflect the market. Your loan may start with a 5% interest rate but could increase to 7% after a few years.

APR: Interest Rate Plus Fees and Other Borrowing Costs

The APR on a loan includes the mortgage interest rate alongside additional costs. So, if you did take out a 6% fixed-rate mortgage for a $255,000 loan, the APR would include additional expenses such as closing costs. Let’s say the house is $300,000 and you put down 15% ($45,000). The APR would also show the private mortgage insurance (PMI) cost for putting less than 20% down.

For a mortgage interest rate of 6%, the APR may be around 6.5% or higher. Keep in mind that if it’s a fixed-rate mortgage, the APR will be fixed as well and likely will not change. If your interest rate is variable, then your APR may also change to show the new interest rate. Regardless of which mortgage you have, your APR is a key indicator of total costs from the lender.

APY: Interest Rate Plus Compounding (For Savings, Not Mortgages)

While APY is influenced by the Federal Reserve as mortgage interest rates can be, your APY is not related to your mortgage. APY refers to how much you’ll gain on an investment, typically related to savings accounts. Over time, interest compounds in these accounts, especially in high yield savings accounts where the rate matters the most.

If you see your APY on an account change, it could be an indicator that interest rates in general are fluctuating, which may impact an ARM. While your APY may reflect changes in the economy that might also affect your mortgage, it has no direct impact on your home loan.

Mortgage Interest Rate, APR, and APY Key Differences

While it’s common to mix up financial rates, there are some important points that make it easier to remember the difference between APR and APY as well as a mortgage interest rate.

Mortgage Interest Rate vs. APR

We cleared up how APY doesn’t affect your mortgage, but you might still be unsure of how mortgage interest rates and APR differ.

Comparing your mortgage interest rate versus APR may make you wonder why your APR is always higher than your mortgage interest rate, and which rate you should trust. Your mortgage interest rate indicates how much you’ll pay for borrowing money and is ideal for directly comparing the impact of certain loan sizes.

Your APR includes other factors such as closing costs or lender fees and can be helpful to compare the expenses of working with different lenders.

How To Use Interest Rate, APR, and APY

When managing your finances, there are a lot of factors to keep in mind. Your mortgage interest rate, APR, and APY all play a role in how much you’re paying or earning. Rely on these rates in the following situations:

• Mortgage interest rate: Use your mortgage interest rate to see the cost you’ll pay for different loan sizes with different down payments.
• APR: Use your APR to understand how much a lender is charging for services and how much that will cost in total alongside your mortgage.
• APY: Use your APY to see how much you’ll gain on savings and compare potential savings accounts to get the most for your money.

Final Thoughts: Interest Rate, APR, APY, and Your Mortgage

APR, APY, and mortgage interest rates are all important factors of your finances, but they’re different rates that are used for separate calculations. APR and mortgage interest rates are costs related to homebuying, while APY shows gains on savings.

By understanding these rates, you can make educated financial choices that serve you best in the long-term. If you’re ready to take the first steps in the homebuying process, start the prequalification process with Freedom Mortgage.