What Is Interest Rate?
The interest rate is the yearly percentage a lender charges on the loan principal, before any fees. It is used to calculate the monthly principal and interest payment, and matters because even a small difference in rate changes the payment and the total interest paid over the life of the loan.
Interest Rate in plain English
The interest rate is the price of borrowing money, quoted as a yearly percentage of what you owe. Your monthly mortgage payment is calculated from it.
A fixed rate stays the same for the life of the loan; an adjustable rate can change after an initial period.
Worked example
On a $300,000, 30-year loan, a 6.5% rate gives a principal and interest payment of $1,896 a month. At 6.0% it is $1,799, about $98 a month less.
What half a percentage point costs
Illustrative example - round numbers, not current market data. Calculated with Reaixo's calculator engines.
Assumptions
- Loan
- $300,000, 30-year fixed
- Rates compared
- 6.5% and 6.0%
| Step | Calculation | Result |
|---|---|---|
| 1. Payment at 6.5% | $300,000 over 360 months | $1,896.20 |
| 2. Payment at 6.0% | $300,000 over 360 months | $1,798.65 |
| 3. Monthly difference | $1,896.20 − $1,798.65 | $97.55 |
| 4. Total interest over 30 years | $382,633 versus $347,515 | $35,119 |
Extra interest at the higher rate: $35,119. Half a point is about $98 a month, but $35,119 over the life of the loan if it is never refinanced.
What this calculation leaves out
- Principal and interest only - taxes, insurance and mortgage insurance are extra.
- Most loans are refinanced or paid off early, so the lifetime figure is an upper bound.
Try it: Interest Rate with your own numbers
Interactive and illustrative: change any value and the results update instantly in your browser. The figures come from the same engines as REAIXO's full calculators.
APR vs interest rate
The interest rate sets the payment. The APR spreads lender charges over the loan, so it is the better number for comparing offers.
- Interest rate
- 6.500%
- Payment $1,896 a month
- APR
- 6.662%
- 0.162 points above the rate
- Finance charges in the APR
- $5,000
- $2,750 of third-party fees excluded
Formula
APR = the rate at which the payments’ present value equals the amount financedAmount financed = Loan − Points − Lender feesAssumptions
- Regulation Z actuarial method, fixed-rate loan held to term.
- Appraisal and title fees are third-party charges not counted as finance charges here.
- If you sell or refinance early, the real cost of upfront fees is higher than the APR suggests.
Amortization: where each payment goes
The payment stays the same, but early payments are mostly interest. Each year a little more goes to principal.
- Monthly principal & interest
- $1,896
- Total interest over the term
- $382,633
- Principal overtakes interest
- Year 20
- Principal
- Interest
Show the numbers as a table
| Year | Principal paid | Interest paid | Balance at year end |
|---|---|---|---|
| 1 | $3,353 | $19,401 | $296,647 |
| 2 | $3,578 | $19,177 | $293,069 |
| 3 | $3,817 | $18,937 | $289,252 |
| 4 | $4,073 | $18,681 | $285,179 |
| 5 | $4,346 | $18,409 | $280,833 |
| 6 | $4,637 | $18,118 | $276,196 |
| 7 | $4,947 | $17,807 | $271,249 |
| 8 | $5,279 | $17,476 | $265,970 |
| 9 | $5,632 | $17,122 | $260,338 |
| 10 | $6,009 | $16,745 | $254,328 |
| 11 | $6,412 | $16,343 | $247,916 |
| 12 | $6,841 | $15,913 | $241,075 |
| 13 | $7,299 | $15,455 | $233,776 |
| 14 | $7,788 | $14,966 | $225,987 |
| 15 | $8,310 | $14,445 | $217,677 |
| 16 | $8,866 | $13,888 | $208,811 |
| 17 | $9,460 | $13,294 | $199,351 |
| 18 | $10,094 | $12,661 | $189,257 |
| 19 | $10,770 | $11,985 | $178,487 |
| 20 | $11,491 | $11,263 | $166,996 |
| 21 | $12,261 | $10,494 | $154,735 |
| 22 | $13,082 | $9,673 | $141,653 |
| 23 | $13,958 | $8,797 | $127,695 |
| 24 | $14,893 | $7,862 | $112,803 |
| 25 | $15,890 | $6,864 | $96,912 |
| 26 | $16,954 | $5,800 | $79,958 |
| 27 | $18,090 | $4,665 | $61,868 |
| 28 | $19,301 | $3,453 | $42,567 |
| 29 | $20,594 | $2,161 | $21,973 |
| 30 | $21,973 | $781 | $0 |
Formula
Payment = Loan × r ÷ (1 − (1 + r)^−n)Interest this month = Balance × r; Principal = Payment − InterestAssumptions
- Fixed rate, no extra payments, no escrow.
- Totals are the sum of scheduled monthly payments, rounded to the cent.
Why it matters
Small rate differences add up: on a $300,000, 30-year loan, half a percentage point is about $98 a month and more than $35,000 of interest over the full term.
What it means for you
How does it affect my budget?
At rates between 6% and 7%, each quarter point changes the payment on a $300,000, 30-year loan by about $48 to $50 a month.
Common mistakes
- Comparing rates without comparing points and fees - a lower rate can cost more upfront.
- Shopping with only one lender.
- Not locking the rate when the purchase timeline is set.
Interest Rate vs. APR
The cost of borrowing the principal, expressed as a yearly percentage — used to calculate your monthly principal-and-interest payment.
A broader annualized borrowing cost that folds in certain lender fees and closing costs on top of the interest rate — usually a bit higher than the rate itself.
APR is generally the better number for comparing total loan cost across lenders, since it accounts for fees the interest rate alone doesn't.
Full comparison: Interest Rate vs APR, with a worked example →
Interest Rate: frequently asked questions
What determines my mortgage interest rate?
Market conditions plus your own profile: credit score, down payment (LTV), loan type and term, property type and whether you pay points. The CFPB's rate explorer shows how each factor moves the rate.
What is the difference between an interest rate and APR?
The interest rate is the cost of borrowing the principal and sets the payment. APR adds certain fees and expresses the total as a yearly rate for comparison.
Can I lower my interest rate?
Yes - by improving your credit, putting more down, paying discount points, choosing a shorter term, or refinancing later if rates fall.
Go deeper
Recommended calculators
Run Interest Rate with your own numbers:
Where it fits
- Buying a home, Search & Affordability: before this, Walk Score; next, APR.
More Financing Terms
Recommended next step
Compare two rate-and-fee offers side by side.
Mortgage rate comparison calculator →Sources and review
- Explore interest rates, Consumer Financial Protection Bureau. Supports: Credit score, down payment, loan term and loan type affect the interest rate offered.
- What is the difference between a mortgage interest rate and an APR?, Consumer Financial Protection Bureau. Supports: The interest rate is the cost of borrowing the principal; APR adds fees.
Where this applies: United States.
Last reviewed: · Updated:
Examples use illustrative figures; rules of thumb are labelled as such. Rates, limits and program rules change - confirm current figures with your lender or a qualified professional.
This definition is provided for general educational purposes and is not financial, legal, tax, or real estate advice. Verify important decisions with appropriately qualified professionals.
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