APR vs Interest Rate: What's the Difference?
Lenders advertise the number that looks smallest. Understanding the gap between interest rate and APR — and how amortization really splits your payment — can save you thousands.
Rate vs APR
The interest rate is what the lender charges on the loan balance. The APR (annual percentage rate) folds in fees — origination charges, points, mortgage insurance — spread over the term. APR is almost always higher, and it is the number to compare when shopping between lenders.
Two loans at 6.5% can have very different APRs if one charges $8,000 in fees and the other $2,000. Always compare APR to APR and ask for a full fee breakdown, not just the headline rate.
How your payment is split
On an amortizing loan, each fixed payment is divided between interest (charged on the remaining balance) and principal. Early on, the balance is large, so most of your payment is interest. As the balance shrinks, the split tilts toward principal.
On a $320,000 loan at 6.5%, the first year's payments are roughly 85% interest. By year 25, they are roughly 85% principal. The mortgage calculator's yearly schedule shows this crossover clearly.
Prepayments attack the expensive part
Extra payments go straight to principal, which shrinks every future interest charge. That is why small overpayments early have an outsized effect — they kill the highest-interest years of the schedule. Model it with the loan prepayment calculator before deciding between investing and overpaying.
Fixed vs variable
Fixed rates cost certainty; variable rates gamble that rates stay low. If a variable rate's worst case would break your budget, it is not a discount — it is risk you are not being paid enough to take. Stress-test any loan at 2–3 points above the quoted rate.