Simple Interest
Definition: Interest calculated on the original principal only of a loan or on the balance of an account.
Unlike compound interest where the interest earned in the compounding periods is added to the new principal, simple interest only considers the principal to calculate the interest.
The interest earned or paid is calculated as follows:
I=P.r.t
Where:
I=Interest
P=initial principal balance
r=interest rate
t=time
The cost of the house was $160,000 ten years ago. 10% down payment was paid and the rest of the cost was financed at r=9% = 0.09 for t = 10 years
The amount to finance is calculated as the initial cost minus the down payment (10%):
P = 160,000 - 160,000*10/100 = 160,000 - 16,000 = 144,000
Question 1: How much money you paid as your down payment?
Answer: $16,000
Question 2: How much money was your existing mortgage (loan) for?
Answer: $144,000
The interest of the loan is calculated below:
I = 144,00 * 0.09 * 10 = $129,600
The total amount to pay is:
M = $144,000 + $129,600 = $273,600
The monthly payment can be calculated by dividing the total amount by the total months in 10 years.
months = 10 * 12 = 120 months
Monthly payment = $273,600 / 120 = $2,280
Question 3: What is your current monthly payment on your existing mortgage ?
Answer: $2,280