How this instrument works
On the promissory note, a mortgage carries one printed figure — the stated (note) rate — and that figure ignores every dollar handed over at closing to obtain it. A discount point costs one percent of the loan amount and buys the rate down; other charges lumped into the same field simply cover the lender's underwriting and origination work. This instrument takes that whole dollar total, divides it evenly by the number of years in the term, and stacks the resulting yearly share on top of the interest the stated rate already implies, turning a rate and a pile of closing-cost receipts into one comparable percentage.
That comparable percentage is a cousin of, not identical to, the APR that Regulation Z forces onto page three of every Loan Estimate. The federal figure is produced by running the whole month-by-month payment schedule through an actuarial method, precise but not something a buyer can reproduce by hand mid-negotiation. Here the same idea is compressed into arithmetic simple enough to check on a phone: multiply the note rate against the loan amount for one year of interest, divide the points-and-fees total by the term, and combine the two into a rate again.
Whoever is staring at two Loan Estimates from two different lenders — one quoting a slightly lower note rate bought down with heavier points, the other a plain rate with lighter fees — is exactly who this arithmetic serves; it puts the fee difference back into rate terms so both offers sit on the same scale. What it will not do is model timing: it treats the points as though their cost lands evenly every year of the term, even though the cash actually left the buyer's account once, at the closing table, and it lumps discount points in with flat lender charges rather than separating the two.
- Enter what you are borrowing into Loan amount, $ — the figure every fee below gets measured against.
- Set Stated (note) rate, % to the headline percentage quoted for the loan, the number before any points get factored in.
- Fold every discount point and lender charge due at closing into Points and fees, $ as one combined dollar total.
- Set Loan term, years to the length of the loan you're pricing — the same closing costs land harder, per year, on a short note than a long one.
- Read Effective (APR-style) rate, % — the note rate plus the annualized cost of those upfront charges.
A note quoted at 6.5% carrying $3,000 in points
Take a loan where Loan amount, $ is 300,000, Stated (note) rate, % is 6.5, Points and fees, $ is 3,000, and Loan term, years is 30. Multiplying the stated rate against the loan amount gives $19,500 of yearly interest implied by 6.5% on its own. Dividing the $3,000 of points and fees by the 30-year term adds another $100 to that figure for every year of the loan. Summing $19,500 and $100 gives $19,600, and measuring that total against the $300,000 principal returns 6.5333...%, which the Effective (APR-style) rate, % field displays as 6.53%.
Holding every other input fixed but changing Loan term, years from 30 to 15 shows the other side of this arithmetic: the same $3,000 charge, now divided by 15 instead of 30, adds $200 a year instead of $100, moving the effective figure to roughly 6.567% — noticeably more separation from the 6.5% stated rate than the 30-year case produced, even though not one dollar of the fee itself changed.
Questions
What counts as 'points and fees' in this calculator?
Discount points — each equal to one percent of the loan amount, paid to buy the note rate down — plus lender charges such as origination or underwriting fees, combined into one dollar figure paid at closing. The sheet treats them as a single upfront cost spread across the term; it does not separate which portion bought down the rate and which portion was a flat lender charge.
Is this the same figure as the APR on my Loan Estimate?
No. The Loan Estimate's disclosed APR runs the entire month-by-month payment schedule through an actuarial method required by Regulation Z, accounting for exactly when each payment lands. This instrument skips that schedule and instead spreads Points and fees, $ evenly across the term, then adds the result on top of the stated rate — a shortcut for comparing two offers quickly, not a substitute for the disclosure number itself.
By how much does the loan term move the effective rate?
Substantially, because Points and fees, $ is a fixed dollar amount divided by Loan term, years — shrink that divisor and the annualized share grows. Stretch the golden-example loan from 30 years to 15 and the $3,000 charge that once added $100 annually now adds $200 annually, moving the effective rate from about 6.53% to about 6.57% without any input other than the term changing.
Can a lower stated rate ever produce a higher effective rate?
Yes, once points are counted. A lender quoting a lower note rate but charging more points can produce a higher Effective (APR-style) rate, % than a competing offer with a higher note rate and lower fees over the same term — the two figures only tell the full story once they are compared side by side, which is exactly what this output is built to make visible.
Does the calculation treat points as paid gradually, the way the annualizing math suggests?
No — that is a simplification the formula makes on purpose, not a description of what actually happens at the closing table. Every dollar in Points and fees, $ actually leaves the buyer's account once, at closing, but the arithmetic divides it by the term and re-adds a slice every year purely to make it comparable to an annual rate. A lender's actuarial APR handles that timing correctly; this shortcut trades that precision for four inputs anyone can work out by hand.
What happens to this figure if I refinance or sell before the term ends?
The effective rate assumes the points and fees are held for the full Loan term, years entered. Paying off the mortgage sooner through a refinance or sale spreads those same upfront dollars over fewer actual years than the calculation assumed, so the true annualized cost of the points ends up higher than the figure shown here.
References
- CFPB — Understanding your Loan Estimate
- Federal Reserve — Consumer's guide to mortgage settlement costs
Read this first: This instrument shows arithmetic, not advice. Real offers add fees, taxes and terms that vary by lender and place — verify the figures against your actual paperwork before deciding anything.