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Effective Rate Formula:
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Loan points are fees paid directly to the lender at closing in exchange for a reduced interest rate. One point costs 1% of your loan amount and typically lowers your interest rate by 0.25%. This calculator helps determine the effective interest rate when points are involved.
The calculator uses the effective rate formula:
Where:
Explanation: The formula calculates the true cost of borrowing by amortizing the upfront points cost over the loan term and adjusting the nominal rate accordingly.
Details: Calculating the effective rate helps borrowers compare different loan options accurately and understand the true cost of mortgage points. It's essential for making informed decisions about whether paying points makes financial sense for your situation.
Tips: Enter the nominal interest rate in percentage, points in percentage, and loan term in years. All values must be valid (rate ≥ 0, points ≥ 0, term > 0).
Q1: What are mortgage points?
A: Mortgage points are fees paid to the lender at closing to reduce your interest rate. Each point typically costs 1% of your loan amount and lowers your rate by about 0.25%.
Q2: When does it make sense to pay points?
A: Paying points makes financial sense if you plan to stay in the home long enough to recoup the upfront cost through lower monthly payments.
Q3: How accurate is this calculation?
A: This provides a simplified estimate. For precise calculations, consult with a mortgage professional who can account for all factors including tax implications.
Q4: Are points tax deductible?
A: Points paid for a primary residence purchase are generally tax deductible in the year paid, while refinance points must be deducted over the life of the loan.
Q5: Can points be negotiated?
A: Yes, points and lender fees are often negotiable. It's worth shopping around and comparing offers from multiple lenders.