Interest rate
Published
What is interest rate?
A mortgage interest rate is the yearly percentage a lender charges on the balance you still owe. It decides how much of each monthly payment is interest and how much pays down the loan.
Interest rate questions
- What is an interest rate on a mortgage?
- It is the yearly percentage the lender charges on the amount you still owe. Each month, one twelfth of that rate is applied to the balance, and that interest is paid out of your payment before anything goes toward the loan itself.
- Is the interest rate the same as the APR?
- No. The interest rate is what sets your monthly payment. APR adds most lender fees, points and other finance charges, so it is usually higher, and it is meant for comparing one loan offer against another.
- Does my mortgage interest rate ever change?
- On a fixed-rate loan it never changes. On an adjustable-rate loan it holds for the opening period, then resets at set intervals to an index plus a margin, within the caps written into your note.
- Does a lower interest rate always save money?
- Not always. A lower rate bought with discount points, or reached through a refinance with high closing costs, only pays off if you keep the loan long enough to earn back what you paid upfront.
What it means in practice
The rate is charged on what you still owe, not on what you first borrowed. At the start of a mortgage the balance is at its highest, so most of each payment is interest. As the balance falls, more of the same payment goes to principal.
Your interest rate and your APR are different numbers. The rate sets your payment. APR adds most lender fees and points, so it is usually a little higher. The Loan Estimate that lenders must give you under CFPB rules shows both on its first page.
A fixed rate stays the same for the life of the loan. An adjustable rate holds for an opening period and then resets on a schedule tied to an index. To see what a different rate does to your payment and total cost, change the rate in the mortgage calculator.