This calculator will compute the effective interest rate of a mortgage when upfront loan costs are included.
Getting APR Straight
In this calculator, the APR is not quite as simple as it appears to be on the surface. When factoring in other variables such as initial loan costs like points and closing fees, the APR shifts subtly to a new figure - and this tool shows you what that actual figure is. When you are quoted a particular interest rate, length of mortgage, and maximum loan amount by a lender, they may discuss with you additional possibilities to shift your financial capabilities in a different direction to make your payments easier and save you money in the end. If you plug those numbers into this calculator you will be presented with a vision of your monthly principal and interest payment that is closer to what the true financing looks like when it is all inclusive of points and closing fees.
What are Points?
There is a slew of questions regarding the points system that is connected to the all important APR. Points are percentages that represent a certain fraction of your total mortgage amount. Two points stand for 2% of your principal, so a total of $1000 out of a $50,000 loan, for example. Points, sometimes called origination fees, broker fees, or loan discount fees, are usually paid in advance and calculated by the lender during the closing meeting after the buyer and seller have put the final touches on the purchasing contract for a home. The closing of your mortgage is the very last step in the home buying process, where money is generally exchanged and contracts are signed and notarized by all involved parties. Points are directly related to the interest rate you end up paying: if you pay points in the beginning, you can get yourself a lower interest rate which will make a decent difference after the life of a 20 year loan. The more points you pay for, the less your APR will be. Conversely, if you pay a higher annual interest rate you will likely not have any points at all. It is essentially a financial and timely tradeoff that will depend on your current financial circumstances and how much free income you have to work with in the first place.
How Points Affect the Mortgage Schedule
The number of points you have works to determine your effective loan amount as well as your effective monthly payment, but usually only by a small amount. If your borrowed total is $50,000, for example, and you have two points, your effective sum will be $51,000 and this figure is what you will make monthly payments based on. In response, these two theoretical points serve to drive up the annual interest rate to an actual interest rate, points inclusive. So, if you start with a 6% APR and add two points to the initial equation, you will end up with a true interest rate of 6.25%. This drives up the base principal and interest payment from $358 monthly to $365 with the points factored in. In this way, points can make a small difference in the overall picture but a big difference in the initial loan scheduling. They are a smart way of offsetting your beginning costs with your final fees due.