Why Your Mortgage APR is Higher Than the Interest Rate

Understanding Mortgage Rates and APR: A Guide by O1ne Mortgage

At O1ne Mortgage, we believe in empowering our clients with the knowledge they need to make informed decisions. If you have any mortgage-related questions, feel free to call us at 213-732-3074. In this article, we will explore the differences between interest rates and APR, and why your APR might be higher than your mortgage rate.

What Is an Interest Rate?

An interest rate, expressed as a percentage, represents the annual cost of borrowing money in terms of interest only. Lenders use this rate along with the loan balance to determine daily interest accrual and monthly payments. This rate does not include other borrowing costs such as upfront or ongoing fees. Mortgage interest rates can be fixed or adjustable. A fixed-rate loan maintains the same interest rate for the loan’s duration, while an adjustable-rate mortgage has a fixed rate for an initial period before it fluctuates based on market conditions.

APR vs. Interest Rate

While the terms interest rate and APR are often used interchangeably, they are not the same. The interest rate includes only the cost of interest, whereas the APR encompasses the cost of interest, broker fees, closing costs, discount points, and other charges incurred to obtain the loan. Both rates are represented as annualized percentages and must be disclosed in your loan estimate.

Why Is My APR Higher Than My Mortgage Rate?

The APR on a mortgage loan is typically higher than the loan’s interest rate because it represents the total cost of borrowing, including all associated fees and charges. While mortgage rates are often highlighted in advertisements, comparing loan offers based on their APRs provides a more accurate view of the total borrowing cost. If there are no additional costs beyond interest, the APR and interest rate will be the same, but this is rare for mortgage loans.

Build Credit to Reduce Your APR

Shopping around is an excellent way to ensure you get the best APR on a home loan. However, it’s also crucial to build your credit history before starting the comparison process. A higher credit score increases your chances of securing a lower interest rate, which results in a lower APR. Check your credit score to assess your current credit health and review your credit report for areas of improvement. This may include paying down credit card balances, paying off small-balance loans, and staying current on payments. Preparing your credit for a mortgage loan can take time, but qualifying for even a slightly lower interest rate could save you tens of thousands of dollars over the life of the loan.

For any mortgage-related needs, don’t hesitate to contact O1ne Mortgage at 213-732-3074. We’re here to help you navigate the complexities of mortgage rates and APRs with confidence.