Known as a common ingredient in mortgage terms, compound interest plays a huge role in creating the payment schedules, which smoothly control how much a borrower must pay every month.
Besides, the mortgage interest rate is also highly crucial as it can define how much interest the borrower needs to pay as well as how much profit the lender may earn. However, what all borrowers also have to consider will be how often the rate can be applied to the mortgage principal. Of course, borrowers are also allowed to lower their interest payments through just controlling the compounding periods.
What Did You Know About Compound Interest?
What is compound interest? It is said to be the interest, which is quite applied to the total amount of debt based on the mortgage (including the principal as well as any interest added into the account). In simple words, whenever the rate is applied, it’ll add the interest into the account. Hence, at the next time the rate is applied, it tends to be multiplied by a combination of both the principal and any of the interest amounts that hasn’t been paid yet. When dealing with the mortgages, compound interest is surely very common. Keep in mind that few mortgages are likely to make use of simple interest that is only applied to the principal.
How About Mortgage Compounding Periods?
The compounding periods (or how often the rate shall be multiplied to add in more interest) are extremely important in mortgages.
In fact, mortgage periods may widely vary. Some can be compounded once every day or week while others can be compounded once/twice per year. Nevertheless, when it comes to most of the mortgages in the United States, the compounding period here is 1 month. In some places where the compounding period is annual or biannual, the rate tends often to be divided into monthly sections with the aim of making it easier to schedule.
How To Apply?
First of all, you are strongly encouraged to calculate the interest rate per payment. At that time:
Interest Rate Per Payment = ((1 + interest rate/compound period)^(compound period/periods per year)) – 1
Secondly, please calculate the monthly loan payment of country as the formula below:
Monthly Payment = – PMT (rate, nper, loan amount), in which:
- Loan amount = loan amount
- nper = total number of payments for the loan
- Rate = interest rate per month
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