A rate which is charged or paid for the use of money. An interest rate is often expressed as an annual percentage of the principal. It is calculated by dividing the amount of interest by the amount of principal. Interest rates often change as a result of inflation and Federal Reserve policies.

For example, if a lender (such as a bank) charges a customer $90 in a year on a loan of $1000, then the interest rate would be 90/1000 *100% = 9%. The interest rate on a mortgage has a direct impact on the size of a mortgage payment - higher interest rates mean higher mortgage payments. So, for most home buyers, higher interest rates reduce the amount of money they can borrow, and lower interest rates increase it. If the interest rate on a $100,000 mortgage is 6%, the combined principal and interest monthly payment on a 30-year mortgage would be something like $599.55 ($500 interest + $99.55 principal). The same loan with a 9% interest rate results in a monthly payment of $804.62.

However, mortgage rates are not the only determining factor when calculating monthly payments on a home mortgage. As a result of the Truth in Lending Act, which was passed in 1968, lenders are required to disclose the annual percentage rate and total finance charge assumed by the borrower. The annual percentage rate (APR) is the total effective interest rate paid on the loan when calculated as a yearly rate. In calculating the total interest paid back, consumers must also take into consideration origination and discount points. Origination points are lender fees charged for initiating the loan. Discount points are points paid to reduce the overall interest rate. Each point is reflected as 1% of the total loan amount. For example, a $500,000 loan with one origination point, one discount point, and a 5% listed fixed interest rate, would add a $10,000 fee to the loan amount. Therefore, the total loan amount would be $510,000, and the annual percentage rate would be 5.1748%.

The APR allows consumers to easily compare mortgage rates between lenders. However, the APR cannot always provide borrowers with the exact total cost of borrowing. One-time fees including appraisal, home inspection, credit report, title, and some preparation fees are usually not included when calculating the APR. When applying for a mortgage, consumers can choose between several types of mortgage interest rates including the popular fixed mortgage rate, variable/adjustable mortgage rate, or a combination of both.