Physical Address

304 North Cardinal St.
Dorchester Center, MA 02124

How Much Is Annual Interest on a Mortgage?

So, you’re thinking about becoming a homeowner and trying to figure out every detail concerning the mortgage application. During this process, you’ve probably stumbled upon something called the APR and found yourself wondering – How much is annual interest on a mortgage?

Model houses on grass

An annual percentage interest (APR) varies from lender to lender according to the type of loan, your credit score, as well as the current market conditions. Knowing your APR can give you a more accurate picture of your payments since it is a measure that reflects the interest rate, mortgage points, broker fees, and any other charges you might have to pay.

How Much Is Annual Interest on a Mortgage and What Does It Mean?

You probably know that your annual income will be one of the key factors considered when you apply for a mortgage loan. But did you know that, besides the interest rate, there’s something called an annual percentage rate?

APR, or annual percentage rate, measures the cost of borrowing money, as it reflects the interest rate, mortgage broker fees, mortgage points, and any other charges you have to pay when getting a loan. You can regard it as a yearly interest generated by the total cost of funds for borrowing the money over the mortgage term.

How Is an Annual Percentage Rate Calculated?

Confusing math equations scare almost everyone, myself included, but when it comes to the APR, the formula looks much more confusing than it actually is. To put it simply, an APR is expressed as an interest rate that calculates what percentage of the principal a borrower will have to pay each year.

But, the APR depends not only on the principal amount but also takes into account fees and monthly payments. This yearly percentage rate is derived by multiplying the periodic interest rate by the number of periods during the year that it was in effect.

Model house, documents, and a pen

The Key Factors That Are Taken Into Account When Calculating the APR

There are numerous factors that affect the rate you will be offered by your chosen mortgage broker, so here are some of the most important ones:

  • The type of loan you acquire,
  • The principal amount, the interest rate, and the monthly fees,
  • The down payment for the house,
  • Current market factors,
  • Your credit score and risk profile.

APR vs. APY – How Do They Affect Each Other?

You might have also come across something called the annual percentage yield (APY), but this calculation is different because it takes into account the compound interest as well. Because of that, an APY is higher than an APR. Also, the higher the interest rate is, the smaller the compounding periods are, which means the difference between the APR and APY is greater.

APR vs. Interest Rate – What Are the Key Differences?

While both are expressed as a percentage, the APR and interest rate have some key differences between them. Here’s a comparison of the most important aspects of each of them:

  • Definition – An interest rate is a percentage measure of what you need to pay a lender for the investment, while the APR is also the cost of borrowing money, but as a yearly percentage,
  • Factors that are taken into account – The interest rate is based on current market rates, credit history, loan amount and duration, and so on. An APR is a more complete measure of the cost of borrowing money because it takes into account the interest rate, but also other broker fees and mortgage points.
  • Effect on mortgage payments – A lower interest usually means lower overall mortgage costs and monthly fees, and because an APR is the broader measure, it is usually higher than the interest rate.

Current Interest and Annual Percentage Rates

Your mortgage packager might be working diligently on finding you the best mortgage deal, but you should still do your research and follow the fluctuations of the average interest rates. Here are the most recent national averages for interest rates, as well as annual percentage rates, as of 12/28/2022:

Type of LoanInterest Rate (%)APR (%)
30-year Fixed-Rate6.316%6.420%
20-year Fixed-Rate6.005%6.138%
15-year Fixed-Rate5.492%5.664%
10-year Fixed-Rate5.708%6.059%
5/1 Adjustable Rate5.853%6.534%
30-year Fixed-Rate FHA6.125%6.859%
30-year Fixed-Rate VA5.828%6.228%

A Few Additional Things You Should Know About the APR

When you’re shopping for mortgages, there are a lot of things to consider, from finding the best mortgage lenders on Zillow to figuring out what kind of life insurance you should get for your mortgage. So, let’s clarify a few additional things you should know about the APR so it doesn’t give you any more trouble and confusion.

Annual Percentage Rate Depends on the Type of Loan You Acquire

Your mortgage rate will depend on the type of loan you acquire. There are several available, and they usually differ depending on the length of the loan and whether the rate is fixed or adjustable. Here are the most common types of loans you can get:

  • 30-year fixed-rate mortgage – the most popular because you will have relatively low monthly payments seeing as the amount is spread over 30 years,
  • 15-year fixed-rate mortgage – obviously, acquiring this type of loan means higher monthly payments, but you will pay it off quicker,
  • 5/1-year adjustable-rate mortgage (5/1 ARM) – you will have a fixed rate for the first five years, then an adjustable rate after that,
  • FHA – loans from private third-party lenders that are regulated by the Federal Housing Administration (FHA) that generally allow lower credit scores,
  • VA – loan program offered by the Department of Veterans Affairs (VA), which does not offer loans but helps veterans and surviving spouses buy property.

What Is an Annual Interest Rate Cap?

An interest rate cap, also known as an annual cap, is the maximum rate increase that can occur on an annual basis if you opt for an adjustable-rate loan (ARM). For example, if the cap is 2%, the new rate can’t be more than that amount when compared to the previous rate, even if the market circumstances dictate for the rate to go higher than that.

Real estate agent handing woman the keys, a man standing next to her

An APR Will Be of Great Help When You’re Comparing Lenders

When you’re comparing lenders and their mortgage rates, as well as checking out different pages such as the Angled Oak Mortgage website or the reviews for City Creek, an APR will be a good way to compare different lenders you’re considering. So, now that you know everything about it, it will be easier to find the right mortgage company for you. Good luck!