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How do banks figure interest rates on home loans? |
for a $123,900 loan at 6% intrest rate u end up paying $213,840 how is that 6% of 123,900 can someone explain this to me Actually, I calculate the total to be $213,033 for a 20-year loan. Here's how it works: In an amortized loan, the lender calculates how much you'd have to pay each month so that the payment stays the same. In this example, the monthly payment is $887.66. The first month, this represents $619.50 in interest ($123,900 x 6% /12) and $268.16 in principal, i.e., the amount of the loan balance is reduced by $268.16. The next month, you still pay $887.66, but you're paying $618.16 in interest ( $123,631 x 6% /12) and $269.50 in principal. The principal amount is $123,631 the second month because it was reduced by $268.16 the previous month. Each month, each payment is comprised a little less of interest and a little more of principal. Over the life of the loan, you'll of course pay a total of $123,900 in principal, but you'll also pay $89,137.51 in interest. The total of these is $213,033, which is $887.66 per month for 20 years, or 240 payments. Hope that helps. You are thinking of simple interest and home loans are amortized. They aren't the same as a car loan, etc. If you go to the internet and google for an amortization schedule, you'll see that most of the money in the early years of the loan is paid toward the interest (profit to bank, mtg co), not the principal (Payoff). The reason for this is that most people don't own a house for 30 years, they move every 3-5 yrs on average, so the bank, mortgage company, etc. would make no profit if they didn't do it this way. Most often there are also government regulations involved that make this more of a non profit venture, then there is pmi, etc. If you want to pay off that loan earlier, get an amortization of your loan and simply pay more towards the principal than you have to. You can effectively pay off a $100K loan in 15 yrs, rather than 30 by one extra principal pmt per year, or 1/12th every month. Build your equity faster, but on your terms ;-) It's 6% per year. For a 15 year mortgage, that's roughly 6 x 15 or 90%. That's not really how they calculate it, but you get the idea. It's too involved to try to explain here. |
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