- Budgeting
- Cash Management
- Consumer and Mortgage Loans
- Debt and Debt Reduction
- Time Value of Money 1: Present and Future Value
- Time Value of Money 2: Inflation, Real Returns, Annuities, and Amortized Loans
- Insurance 1: Basics
- Insurance 2: Life Insurance
- Insurance 3: Health, Long-term Care, and Disability Insurance
- Insurance 4: Auto, Homeowners, and Liability Insurance
- The Home Decision
- The Auto Decision
- Family 1: Money and Marriage
- Family 2: Teaching Children Financial Responsibility
- Family 3: Financing Children’s Education and Missions
- Investments A: Key Lessons of Investing
- Investments B: Key Lessons of Investing
Calculating Effective Interest Rates
The three-step process for calculating the EIR is:
- Calculate the payments on the total amount you will be repaying (the amount borrowed). Using your financial calculator, set N = your number of years, I = your interest rate, PV = minus the loan amount, and solve for your payment, or PMT.
- Calculate the amount of money you actually received (the total loan less all costs). Again, assume that all costs for the home come out of the loan. This amount becomes your present value (with a minus sign).
- Set your payment (PMT) to your annual/monthly payment. PV = minus what you actually received, N = your years, and solve for your interest rate. This is the rate you are actually getting based on the costs you are paying.
The effective interest rate gives you the rate you are paying after all fees and expenses are taken into account. For example, if you are borrowing $200,000 at 6% for 30 years, and you agree to pay 2 points and $1,500 in fees, the process is:
- Your monthly mortgage payment will be $1,199. (PV=-200,000, I = 6%, N = 30*12, and solve for your PMT)
- Two points and 1,500 in fees will be $5,500, resulting in a net to you amount of $194,500 ($200,000 – 5,500).
- Inputting these figures into the equation, your PMT is $1,199, PV = - 194,500, N = 30*12. Solve for your Effective Interest Rate, and you get a rate of 6.26%.
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