Question 1

What's the difference between interest rate and APR when comparing loans?

Accepted Answer

The interest rate is what you pay on the principal. APR (annual percentage rate) bakes in origination fees, points, and certain closing costs to give an all-in annual cost. Two loans at 6.5% interest might have very different APRs — 6.5% versus 6.85% — once $3,000 of fees are spread over the loan term. APR is the fairer cross-lender comparison; this calculator surfaces an effective rate that includes fees for the same reason.

Question 2

Why does a lower monthly payment sometimes cost more overall?

Accepted Answer

Lower monthly payments usually come from a longer term, not a better deal. A $250,000 loan at 6% over 30 years has a $1,499 payment but $290,000 in total interest. The same loan over 15 years jumps to $2,110/month but only costs $130,000 in interest — $160,000 less. Always compare total cost over the full term, not just the monthly figure.

Question 3

Should I pay points to lower my rate?

Accepted Answer

Each point typically costs 1% of the loan amount and lowers the rate by about 0.25%. Calculate the breakeven: divide point cost by monthly savings. On a $300,000 loan, one point ($3,000) might cut the payment by $50/month — breakeven at 60 months. Stay in the loan longer than breakeven and points pay off; refinance or move sooner and they don't. Points are most worthwhile on long-term holds.

Question 4

How do origination fees affect the comparison?

Accepted Answer

Fees raise the effective cost above the headline rate. A 6.0% loan with $5,000 in fees on a $200,000 principal effectively delivers you only $195,000 — your effective rate climbs to roughly 6.4% over a 5-year term. This calculator's effective rate output amortizes fees across the term so you can compare loans with different fee structures on equal footing. Always include all upfront costs, including third-party fees the lender requires.

Question 5

Is the lowest total cost always the best loan?

Accepted Answer

Usually but not always. A loan with a slightly higher total cost might be the right choice if it has no prepayment penalty, allows recasting, has flexible hardship provisions, or comes from a lender with better service. For business loans, look at covenants and personal guarantee terms. For mortgages, check assumability and portability. Total cost is the starting point, not the only criterion.

Question 6

Should I refinance an existing loan?

Accepted Answer

Refinancing makes sense when (new rate × remaining principal × remaining term) plus refi closing costs is less than continuing the current loan. A common rule of thumb is a rate drop of at least 0.75–1.0% and plans to keep the loan past the breakeven point. Calculate breakeven by dividing closing costs by monthly savings — if costs are $4,000 and savings are $200/month, breakeven is 20 months. Move or pay off sooner than that and the refi loses money.

Loan Comparison Calculator

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