Interest Rate, APR, and TIP: What’s the difference?
After completing your mortgage application, getting pre-approved for a home loan, and finding your dream property, your mortgage advisor will provide you with a Loan Estimate.
The Loan Estimate outlines all the estimated costs and fees of your mortgage, including both the closing costs and your monthly payments over the life of the loan.
When you review your Loan Estimate, you'll see three key terms: Interest Rate, Annual Percentage Rate (APR), and Total Interest Percentage (TIP). These terms can often be confusing, but they each mean something different. Here's a breakdown:
Key Takeaways
Difference between Interest Rate, Annual Percentage Rate (APR), and Total Interest Percentage (TIP)
What fees and costs go into the APR
Interest Rate
Interest is the extra amount you pay each month in exchange for getting a loan. Your interest rate is a percentage that determines your monthly interest payment. On your monthly mortgage bill, there's the principal amount, which is the part of your payment that goes toward paying off your home's loan amount.
In addition to your monthly principal payment, you also have your monthly interest payment. The higher the interest rate, the higher your monthly interest payment.
Several factors affect your interest rate, such as current market rates, your credit score, location, home price, loan amount, down payment, loan term, type of mortgage, and more. Many homeowners choose to refinance later to get a lower interest rate and save on their mortgage.
Annual Percentage Rate (APR)
The Annual Percentage Rate (APR) is different from your interest rate. The APR includes your interest rate plus all the other finance costs and lending fees you pay to get a loan, expressed as a percentage rate.
The APR takes into account all costs associated with obtaining your home loan, such as the interest rate plus other charges like points, mortgage broker fees, prepaid finance charges, admin fees, or any fees that go directly to the lender, as these are all forms of finance charges.
Total Interest Percentage (TIP)
The Total Interest Percentage (TIP) is the total amount of interest you will pay over the loan term, expressed as a percentage of your loan amount. In other words, it's how much interest you'll pay over the life of your loan compared to the amount that you borrowed.
Summary: Interest Rate, APR, and TIP
Interest Rate: The additional amount of money you pay each month in exchange for obtaining a loan. It determines how much you will pay in monthly interest.
Annual Percentage Rate (APR): Your interest rate plus all other finance costs and fees that you pay to get a loan, expressed as a percentage rate.
Total Interest Percentage (TIP): The total amount of interest you pay over the life of your loan compared to the amount that you borrowed.
