The “annual percentage yield,” or APY, is the annual interest rate, taking into account the frequency and cost of compounding interest.
Because APY factors compounding interest into the interest rate, it measures the true percentage of interest a borrower will pay in a one-year period, as opposed to just looking at the interest rate and nothing else.
With APY, compounding interest is king. Instead of simply looking at mortgage rates, you look at the terms and the rate. Essentially, the amount of times your interest compounds in a year and the corresponding interest rate. To put it simply, the more times your interest compounds in a year while carrying a balance, the higher your APY, or actual interest rate. The bank might compound your interest semi-annually, quarterly, monthly, or daily.
Because banks and mortgage lenders know consumers are always looking for the lowest rate, they will often quote potential homeowners with the APR, not the APY, because the former number is always lower. However, when banks and lenders offer savings accounts, they will advertise the higher of the two numbers, the APY. Keep in mind a savings account that compounds daily will yield a higher APY than an account that only compounds monthly or less.
This should give you a good idea as to what the bank’s intentions are, and also what number you’ll want to look for when seeking a mortgage or savings account.