A  mortgage’s  interest rate  and APR are both super important for getting a clear picture of the  total  cost of a loan, but they  represent  different  aspects. Your mortgage interest rate is the percentage of the loan amount you pay to borrow, but your APR is a more holistic view of the full annual cost of borrowing. It includes the interest rate plus any extra fees. Here’s a quick chart to help you understand what each term really means and how  it affects your loan: 

Simply put, an interest rate is the cost you pay to borrow money, expressed as a percentage. You might see interest rates advertised by banks and lending groups as the headline figure for loans and mortgages.

Interest rates in action

Scenario: You take out a $300,000 mortgage with an interest rate of 6% per year to be paid over 30 years. The interest rate is fixed and will not change over the 30-year term of the loan.

Monthly payments: Using a mortgage calculator, we can determine that your monthly payment would be approximately $1,799.

How payments are split: Every month, your payment is divided into principal (the cost of the mortgage) and interest (the fee you pay for borrowing). The interest for the first month is calculated as 6% of $300,000, divided by 12 months, which equals about $1,500. So, of your $1,799 payment, $1,500 goes toward interest, and the remaining $299 reduces your principal.

Subsequent payments: In the second month, your new principal is $299,701 ($300,000 - $299). The interest for this month is calculated on the new principal, which would be slightly less than the first month's interest. Therefore, a slightly larger portion of your second payment goes toward reducing the principal.

Long-term impact: This process continues each month, gradually decreasing the interest portion and increasing the principal portion of your payment until the loan is paid off. This is often referred to as an amortization schedule.

The annual percentage rate is a measure of the cost of credit, expressed as a yearly rate. It goes a step further than the interest rate by including costs of a home loan, such as mortgage insurance, discount points, loan origination fees and other loan-related charges. The APR is also expressed as a percentage and provides a more comprehensive look at the cost of a loan.

When you’re looking at loans, a low interest rate might seem like the best deal. But let’s take a closer look—there's more to the story when it comes to APR.  

Imagine you have two loan options:  

• Loan A has a lower interest rate but comes with higher fees
• Loan B has a higher interest rate but lower fees  

At first glance, Loan A may appear more appealing due to its lower interest rate. However, because it has higher fees, it may have a higher APR. That might mean Loan B is actually the better deal in the long run. The APR provides a more comprehensive view by showing the total yearly cost of the loan, not just the interest rate.

Citi makes it easy to review current mortgage rates and understand how fees factor into the total cost of borrowing.

Interest rates are always on the move, so it's normal to see them go up and down while shopping around. There are several key factors that go into the specific rate you may be offered.

1. Credit score: Sporting strong credit can unlock lower interest rates, signaling to lenders that you’re a safe bet for timely repayments.
2. Loan amount and loan term: Usually the interest rate for a loan will differ depending on the loan size and the loan term, meaning how long the loan is expected to take to pay off.
3. Current market conditions: Inflation and economic growth play a major role in setting interest rates and affect whether they trend up or down. The rate set by the Federal Reserve, commonly known as the fed funds rate, reflects current market conditions. Changes in the fed funds rate influence the prime rate, or the interest rate lenders charge their most creditworthy borrowers. The prime rate can affect the cost of consumer products including mortgages.
4. Fixed vs. variable rates: Interest rates come in two flavors: fixed and variable. While the rate of a fixed rate mortgage does not change during the term of the loan, the rate of a variable-rate loan, or an adjustable-rate mortgage, can change over time. To prevent these rates from changing too drastically, variable-rate loans have caps that limit how much the interest rate can increase or decrease, or a period where the rate stays fixed before it starts to vary, giving you some initial stability.  

Other elements, such as the type of loan, your location, the type of property, the purpose of the loan and the loan-to-value ratio may also play critical roles in setting your interest rate.

The APR is calculated by combining the interest rate with other costs, such as loan related closing costs or private mortgage insurance. These total costs are expressed as a yearly rate. The Truth in Lending Act requires lenders to disclose the APR, ensuring transparency so you can make an informed decision when comparing similar loan programs.

Typically, home buyers are on the hunt for the lowest interest rate they can find to make their monthly payments more affordable. There are a few ways you can increase your chances of locking in a lower rate.

Raise your credit score

Boosting your credit is arguably the most direct way to influence the interest rates available to you. Making your payments on time, lowering your credit utilization ratio and limiting the number of hard credit checks on your report may help raise your score.

Get a government-backed loan

Borrowers with lower credit scores or a lower down payment may find that government-backed loans, like FHA or VA loans, have lower interest rates available compared to conventional loans. These loans are insured by government agencies, meaning the lenders can offer lower rates because they’re taking on less risk.

Buy down the rate

The interest rate can be lowered by paying discount points. Mortgage points are a fee, that lowers the interest rate. One point typically costs 1% of the total loan amount and generally lowers the interest rate by 0.25%. The lower rate applies to the life of your fixed-rate loan.

Increase your down payment

Upping your down payment can help lower your loan-to-value (LTV) ratio. That’s a fancy way of saying the percentage of your home's value that's covered by your loan. A lower LTV may help you snag a lower interest rate. So, making a larger upfront payment can pay off with smaller interest payments down the line.

Leverage relationship pricing programs

Some lenders, like Citi, offer special pricing programs for existing customers. For example, Citi's Mortgage Relationship Pricing program offers closing cost discounts or a discount on the interest rate for new and existing Citi banking customers based on their Citi Eligible Balances.

Important Terms & Conditions

Getting a handle on the difference between APR and interest rate can be a game-changer when finding a great deal on your dream home. While the interest rate shows the basic cost of borrowing, the APR gives you a clearer picture of the total cost each year.  

Understanding this distinction helps to ensure that you’re not just snagging a low rate, but also getting the most favorable overall terms for your mortgage.