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Understand Interest Rates

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Key Factors of Mortgages: Understand Interest Rates

The basics

If you understand the interest rates, you should know a few things about the basic principles of money lending and loan. The idea of ​​the loan itself goes back to thousands of years B.C. to the ancient Sumerians, who used a combination of grain and metal coins to lend and make payments.

Interest and religion

Although “interest” is frowned upon in some religions that emerged shortly after this time, almost all modern societies are interested in some form, and nowhere is it so complex – and potentially paralyzing, if not understood – as the mortgage industry.

How interest works

When you pay interest, you pay a fee to use someone else’s money to buy your home. Although you only have to make one payment, it has two parts – “principal amount”, that is the amount of the originally borrowed money you pay, and “interest”, the fee you pay for the right money for it uses a predetermined time. The “interest rate” is the percentage of the original loan amount that you pay over a certain period of time.

Types of interest

There are different types of interest. “Simple interest” is a sum of interest over a period divided by the original principal. “Compound Interest” is an annual calculation and, although more difficult to understand, solves some problems inherent in simple interest rate calculations. This interest is given every year, so if you are told the interest rate is 10% to $ 100, you will pay $ 110 by the end of the loan.

To calculate interest

A mortgage rate is calculated annually, and interest is usually calculated monthly so that the lender divides the interest rate for each payment to 12. That is if you have a rate of 12% (mathematically speaking, .12) your monthly rate is 0.01. To find your monthly payment, multiply your loan amount by .01.

Reduce your loan amount

However, when you make your payment, you reduce your loan amount. This means that the payment of principal and interest for the next month has a different ratio between the two numbers, while the payment remains the same. Why? Because you no longer owe the original loan amount.

For example, if your loan amount is $ 200,000 and your interest rate is the above 12%, your first interest payment is $ 2,000. If you make a total payment of $ 3,000, $ 1,000 of it goes into the payment of the loan amount or the capital. Your next interest payment will be $ 199,000 and will be $ 1,990. If you make your payment of $ 3,000, then $ 1,010 will go to the principal. It does not sound like much of a difference, but over time you will make a big dent in the amount you owe, and your final payment will have much less interest than the principal.

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