How to Calculate the Effective Annual Rate With Points
- 1). Multiply the number of points charged for the loan times the amount of the loan to calculate the cost of the points. For example, if you are paying three points on a $200,000 loan, the cost of the points is $6,000.
- 2). Calculate the total of payments using the cost of points for the term of the loan at the loan interest rate, using a mortgage loan calculator. If the example loan is a 15-year mortgage at a 6 percent rate, the $6,000 in points over a 15-year term at 6 percent results in payments of $50.63 and a total of the payments of $9,113.77.
- 3). Calculate the total of the loan payments at the loan interest rate. For the example, a $200,000, 15-year mortgage at 6 percent has a monthly payment of $1,687.71 and the total of the payments for the full term would be $303,788.79.
- 4). Add together the payment totals for the loan payments and the amount calculated for the points. The example totals of $9,113.77 and $303,788.79 total $312,902.55.
- 5). Enter increasing rates into the mortgage calculator with the original loan amount until you get total payments equal to the amount determined above. Including the cost of the points puts the effective rate above the loan rate. Trying different rates shows the payment total falling between a rate of 6.4 percent and 6.5 percent. Further interpolation of rates shows a rate of 6.47 percent and gives a payment total of $313,000. This rate of 6.47 percent is the effective rate of paying the three points up front on the loan.
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