Monthly Archives: February 2014

How To Calculate Rate Of Interest

Calculate Rate Of InterestCalculating the rate of interest for any kind of loans is simple and if you keep a track of it then it should match with the interest that you pay in the end. The easiest way to calculate the interest is by multiplying the given rate of interest with the number of years the loan has been taken. Suppose you have bought a house and have taken a loan for it. The interest rate for the loan is 5% while the mortgage amount is $250,000 and the total repayment time is 30 years. The rate of interest or the total interest will be calculated by dividing the monthly payment by 360 and multiplying the amount with the number of times in which you have to pay the full amount back. After this the private mortgage insurance and taxes can also be deducted. The rate of interest and the amount resulting in the end depends on several factors which are discussed below:

Amount of loan– the amount of interest that you pay is directly proportional to the amount of loan you have taken. Larger the amount of loan higher will be the amount of interest. However if the down payment is more, then the total interest can be lower.

Length of loan- generally a loan is taken for 15 or 20 years. If you think that paying a small amount on a monthly basis is beneficial for you then the length of the loan can be longer. But in such cases the total interest in the end is a lot more. Suppose you have to pay $100 per month for 15 years but you prefer to pay it in 20 years. In this case, although the size of the your monthly outflow will go down, the total interest paid in 20 years will be more than that paid in 15 years with a higher monthly outflow (more popularly referred to EMI).

Interest rate– this makes a great impact on the amount that a person has to pay in the end. Even with the slight change in the interest rate the total amount of interest can change a lot. There are however concepts of adjustable and variable rates but that is a rare case. As you start paying the principal amount on a monthly basis the impact of the rate of interest starts to decrease. The duration of the loan is also vital in this case in order to determine the accurate amount.