mortgage interest calculation?
by Mortgage Rates on Wednesday, October 27th, 2010 | 3 Comments
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No – I guess the standard of education in USA is even worse that it is in UK .. at least here we know that the ‘average’ year has 365 1/4 days in it
Maybe they take 1 year = 12 months of 30 days each .. so they don’t have to ask anyone what month it is
So you get 5 ‘interest free’ days every year ?
If so, how nice of them
NB. Guess you don’t look forward to February .. you get charged 30 days interest even when there’s only 28 days in the month ..
It does not matter how they do their stupid calculations. APR is the true interest rate calculated in the mathematically correct way and you should go by that and nothing else.
Okay. First of all it depends on what kind of loan it is. Most of the loans we deal with have a daily interest factor with 365 days in the year, however our commercial loans are calculated using 360 days. This is generally a standard practice throughout most financial institutions, though not all do this.
Your APR/APY is a completely different thing which has little to do with this calculation that they are using. APR is simply a stated rate; this is the rate at which your interest is calculated, in your case 5.375%. APY is the stated rate compounded daily (in your case). This entire means is that factoring in the interest you are paying 5.478% per annum, not 5.375%.
The above also holds true with deposits, and most people have an easier time understanding this one. Take for instance a CD of $1,000 @ 3.00% interests for 12 months. Simple interest says 1000 X .03 = $30.00, however this is not the case. If you put $1,000 in a CD for 1 year, compounded monthly (12 times) you do not get $30.00, you will get $30.42 (roughly). With that said, your “stated rate” or APR is 3.00% but your APY is 3.042%. This is simply because the interest you receive each month is capitalized and you will receive interest on the interest the following month, so to speak.
With a loan you are paying down more interest than you are principle, in the beginning, then towards the end of the loan, the inverse is true, thus you will have a lower APY in the end than you did in the beginning. I hope this helps a little, sometimes it can be a bit complicated, I for one had a hell of a time trying to grasp this concept prior to college. Good luck!!!