Whenever you evaluate loan options, one of the first things you’ll see is each of their interest rates and annual percentage rates (APR).

It’s easy to conflate the two. After all, they’re both shown as percentages, and their figures are often close. Yet, each represents entirely different things. Knowing their differences can help you better evaluate each loan option and pick the one that saves you the most money.

To explore mortgage APRs vs interest rates, we’ll start by defining each.

### Interest rate: The cost of borrowing money

When a bank lends you money, they make a profit by charging you more than the original loan amount. Any amount that exceeds the value of your loan (i.e. principal) is interest. An interest rate is the annual percentage of the loan amount you’re charged on top of principle.

For example, if you take out a loan for \$100,000 and your interest rate is 4%, you’re charged \$4,000 per year. You’ll likely be making mortgage payments every month, so you can expect to pay \$4,000/12 = \$333.33 per month in interest.

Note: As you pay down your principal over time, your interest charges will decline (assuming you have a fixed rate).

Related: A homebuyer’s guide to mortgage acronyms

### APR: A more comprehensive calculation

An APR calculates the annual cost of your loan by adding your interest rate with your loan origination fees, application fees, among other closing costs.

Since the APR takes additional costs into account, it’s higher than your interest rate.

Let’s calculate it by using the numbers from our earlier example, only now we’ll add \$10,000 in closing expenses and clarify that the loan is for 30 years. To recap:

Loan amount = \$100,000
Interest rate = 4%
Closing costs = \$10,000
Loan term = 30 years

To get your APR, you’d use the following formula (fees in this case would just be our closing costs):

The formula is a bit overwhelming, right? You can skip the manual calculations and plug your numbers into this calculator to automatically get your APR.

Using the numbers from our example, your APR would be 4.81%, and your monthly payments would jump up to \$525.16.