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Effective Rate Formula:
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The Mortgage Calculator With Points Option helps determine the effective interest rate when paying discount points upfront. Points are fees paid to reduce the mortgage interest rate, with each point typically costing 1% of the loan amount and reducing the rate by 0.25%.
The calculator uses the effective rate formula:
Where:
Explanation: This formula calculates the effective interest rate by spreading the cost of points over the loan term and subtracting it from the original rate.
Details: Calculating the effective rate helps borrowers understand the true cost of paying points and determine if this option provides better long-term savings compared to a higher rate without points.
Tips: Enter the original interest rate (%), points percentage (%), and loan term in years. All values must be valid positive numbers.
Q1: What are mortgage points?
A: Mortgage points (discount points) are upfront fees paid to the lender at closing in exchange for a reduced interest rate on your mortgage.
Q2: How much does one point reduce the interest rate?
A: Typically, one point (1% of the loan amount) reduces the interest rate by 0.25%, though this can vary by lender and market conditions.
Q3: 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.
Q4: Are points tax deductible?
A: In many cases, points paid on a mortgage for a primary residence are tax deductible in the year they are paid, but consult a tax professional for specific advice.
Q5: Can points be negotiated?
A: Yes, the number of points and their cost are often negotiable with the lender, along with other loan terms and closing costs.