What Does The Effective Rate of Interest (ERI) Mean

What Does The Effective Rate of Interest (ERI) Mean

Debt in an inflationary environment with low interest rates is virtually free. This is due to the combination of the cost of goods and services going up in relation to the cost of money. When one applies a tax deductibility to this interest rate on real estate, it delivers an Effective Rate of Interest (ERI). For example, a 5% interest rate on a $100K balance, costs $5K in yearly interest. When filling out a Form 1098 Mortgage Interest Statement, yes even for a HELOC, one is able to deduct that interest towards taxes. So, paying $5K in interest but getting $2K back because of its deductibility, only costs $3K vs $5K. So one truly paid 3% interest rather than 5%. That's called the effective rate of interest and that's how it is calculated.

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