Interest Rate vs. APR: Why the Difference Matters More Than You Think
The interest rate on a mortgage is the annual cost of borrowing the principal — it determines your monthly payment. The Annual Percentage Rate (APR) is the true annual cost of the loan, incorporating the interest rate plus all fees: origination fees, discount points, mortgage broker fees, and certain closing costs. By law (in the US, under TILA), lenders must disclose both.
The gap between interest rate and APR is your best quick measure of a loan's fee load. A loan with a 6.5% interest rate and a 6.85% APR carries significant upfront fees. A loan with a 6.5% rate and a 6.52% APR is nearly fee-free. Always compare APRs when shopping across lenders — never compare advertised rates alone.
How Amortisation Works Against You Early On
A fully amortising fixed mortgage splits every monthly payment between interest and principal according to a schedule that front-loads interest payments. In month one of a 30-year, $400,000 mortgage at 7%, your payment of approximately $2,661 consists of roughly $2,333 in interest and only $328 in principal reduction. After 5 years of payments, you've paid $159,660 — but reduced your principal by less than $20,000.
This isn't a bank conspiracy — it's compound interest mathematics. But understanding it reveals why extra principal payments in the early years of a mortgage are disproportionately powerful. An extra $200/month from year one on that same loan eliminates approximately 5 years and $60,000 in total interest.
Points: When Buying Down Your Rate Makes Sense
Discount points allow you to prepay interest at closing in exchange for a permanently lower rate. One point equals 1% of the loan amount ($4,000 on a $400,000 loan) and typically reduces the rate by 0.25%. Whether buying points makes sense depends entirely on your break-even horizon: divide the point cost by your monthly payment saving. If you plan to hold the mortgage longer than that break-even period, buying points is rational. Most borrowers overestimate how long they'll keep their loans — the average US mortgage is paid off or refinanced within 7 years.
Running Your Own Amortisation Schedule
Use our Mortgage Calculator to generate a full amortisation schedule for any loan amount, term, and rate. You can see the exact month-by-month split between principal and interest, the total interest paid over the life of the loan, and the impact of additional principal payments — all calculated instantly in your browser.