A loan is sold on its interest rate, but the rate isn’t the whole price. Two loans can quote the same rate and cost very different amounts, because one piles on fees the other doesn’t. The honest way to compare them is to fold the fees into the rate — and that’s exactly what this tool does, then shows the cost in plain dollars too.
How it works
The note rate only counts interest. To capture the fees, the calculator asks a sharper question: given the money you actually receive (the loan minus upfront fees) and the payments you actually make, what single annual rate makes the two balance? That rate — the effective annual rate — is found by solving for the internal rate of return, the same idea behind a lender’s APR. As the CFPB explains, the APR “is the interest rate plus any additional fees charged by the lender,” which is why it’s usually higher than the rate on the page.
Below the rate, the tool also adds up the total interest over the loan and the upfront fees, so you can see the cost of borrowing as a number of dollars, not just a percentage.
An example
Take the values already filled in: a $300,000 loan at a 6.5% note rate over 30 years, with $6,000 in upfront fees and points. Folding the fees in lifts the effective rate to about 6.90% — and a U.S. lender would quote an APR near 6.7% for the same loan, a touch lower because it doesn’t compound. In dollars, you’d pay roughly $382,600 in interest plus the $6,000 in fees, for a $388,600 cost of borrowing. Now drop the fees to zero: the effective rate falls back toward the note rate. That gap is the fees, expressed as rate — which is what lets you compare a low-rate-high-fee loan against a higher-rate-no-fee one on equal footing.
The part that matters
The rate with fees folded in is the number to compare across offers. Three honest notes:
- Effective vs. quoted APR. This figure compounds, so it sits slightly above the Truth-in-Lending APR your lender prints. In the mortgage range the difference is a fraction of a percent; for very high-rate, short-term debt it grows, so read this as the effective cost, not a Reg Z quote.
- It assumes you keep the loan to term. Upfront fees are spread across the full term. If you sell or refinance early, those fees are paid off over fewer years, so your real effective rate is higher than shown — points especially only pay off if you hold the loan long enough.
- Garbage in, garbage out on fees. The rate is only as honest as the upfront cost you enter. Include the lender’s charges that don’t come back; the result is an estimate built from your numbers, not a loan offer.
Change the values above to compare two real offers — same amount and term, different rate and fees — and let the effective rate settle which one is actually cheaper. If you already have a loan and rates have fallen, the refinance calculator shows whether switching pays off.