Money will never grow on trees, surely! However, you’re able to earn more money if knowing where to put it.
In general, many mortgage lenders count on this, and then ask for compound interest on the amount of money you’ve borrowed. Compound interest, basically, has a borrower paying a percentage of what he owes at the regular intervals (often every year). For compound interest, the basic formula will be A= P (1+r)^n, in which the “^” is considered a sign for “the power of,” meaning that you have to multiply (1+r) by “n” number of times.
How To Compute Compound Interest On A Mortgage?
First of all, please figure out the interest rate, the principal of mortgage (amount borrowed), as well as time/term (i.e. 15 years, 30 years, 40 years, etc.)
 Next, it’s time to enter the data into the formula: A= P (1+r)^n, where:
- A: the total cost of the mortgage, including interest
- P: the amount you firstly borrowed to pay for the property or simply called the principal.
- R: the interest rate
- N: the number of years or times that the interest will be compounded during the loan’s life.
Keep in mind not to introduce the interest rate as a percentage; instead, as a fraction. A 10% interest rate, for example, should be inserted as 0.1 while 5 percent needs to be inserted as 0.05.
After that, you’re advised to compute A by resolving the formula. In any case, you have to calculate (1+r)^n initially, and then multiply by P. One clear example to illustrate this is as follows. If you borrow the amount of $100,000 for 10 years at an interest rate of 5%, then this will be what your formula looks like: A = 100,000 (1+0.05)^10. As mentioned above, the “^” shall be a sign for “the power of,” meaning that you need to multiply (1+0.05) by 10 times. Hence, the consequence should be: 100,000 x 1.628895 = $162,889.50.
Lastly, feel free to subtract P (the mortgage principal) from the total cost of A (the mortgage), and you shall have the compound interest that you paid or will pay on the mortgage. In the above example, the compound interest was finally calculated as $162,889.50 – 100,000= $62,889.50. As you see, money surely does grow if it is only on the lenders’ trees.
Don’t forget to turn the compound interest on its head, and then invest money into a savings account, rather than borrowing it. With this wise way, you shall be on the kinder aspect of compound interest.
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