1. What is Mortgage Effective Interest Rate?

The effective interest rate (EIR) is the actual interest rate on a mortgage after accounting for compounding. It's higher than the nominal rate when interest compounds more frequently than annually, showing the true cost of borrowing.

2. How Does the Calculator Work?

The calculator uses the effective interest rate formula:

Where:

• Nominal — The stated annual interest rate (as percentage)
• 12 — Number of compounding periods per year (monthly)

Explanation: The formula accounts for monthly compounding, showing how interest earns interest throughout the year.

3. Importance of Effective Rate Calculation

Details: Comparing loans requires looking at effective rates rather than nominal rates, especially when different compounding periods are involved.

4. Using the Calculator

Tips: Enter the nominal annual interest rate as a percentage (e.g., 5.25 for 5.25%). The calculator shows both percentage and decimal results.

5. Frequently Asked Questions (FAQ)

Q1: Why is effective rate higher than nominal rate?
A: Because of compounding - interest is calculated on previously accumulated interest during the year.

Q2: How often do mortgages typically compound?
A: Most mortgages compound monthly, though terms can vary by lender.

Q3: What's the difference between APR and effective rate?
A: APR includes fees while effective rate only accounts for compounding. Both show true borrowing costs.

Q4: Does effective rate matter for fixed-rate mortgages?
A: Yes, it shows the true cost regardless of rate type, though impact is more noticeable with higher rates.

Q5: How does compounding frequency affect the rate?
A: More frequent compounding (daily vs monthly) increases the effective rate slightly.