In real estate finance, the Effective Interest Rate is the true percentage of interest a borrower pays for the use of borrowed money. It reflects the actual cost of the loan after considering factors such as discount points, fees, loan structure, and the timing of payments, rather than just the stated or nominal interest rate.
Because it accounts for these additional costs, the effective interest rate is often higher than the nominal rate shown in the loan documents. This rate provides a more accurate measure for comparing loan offers and understanding the real cost of financing a real estate purchase.
