Interest Rate

• A interest rate is the fee that a lender changes annually through the duration of the loan. Interest rates are typically how banks and investors will make money off of the term of the loan
  
  

How Interest Rates are Calculated

• Interest rates are calculated by dividing the amortized (or total) amount of interest charged by the loan amount. If a lender charges a customer $100 a year on a loan of $10,000, then the interest rate would be (10/10000) x 100 percent = 10 percent.
  
  

Annual Percentage Rate (APR)

• Your APR is made up of two charges: your interest rate as well as any additional charges. Additional charges include things such as pre-paid interest, closing fees or mortgage insurance.
  
  

How APR is Calculated

• APR is calculated higher in most cases than an interest rate, since your APR takes into account all of the additional fees over and above your principal and interest. Your annual percentage rate is the total cost of the loan on a yearly basis for the full term of the loan.
  
  

Controlling Costs

• While interest rates are based on the market and your credit history, controlling costs such as pre-paid items, closing costs and mortgage insurance is something you can have some control over. For example, choosing a FHA loan versus a conventional loan will eliminate some mortgage insurance premium fees.
  
  

Compare

• It isn't wise to go with the first lender willing to issue you an approval for a mortgage. Shop rates, fees and administrative charges with at least three lenders prior to deciding on who gets your business.