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There are several factors that affect how much interest you pay from the interest rate your lender sets to the loan term you sign up for — and you can save thousands by taking advantage of those terms.
Mortgages are among the largest financial obligations most Canadians hold. The calculation of interest is quite complex, but it is important to consider because it can help you plan, make financial choices and catch errors. In addition, knowing your mortgage interest amount means you know the real cost of financing which can be ambiguous at face value. Once you know the cost, you can make educated financial decisions, such as whether to refinance, ask for different conditions or choose another mortgage lender. By the end of this guide, you’ll know how to calculate interest on a mortgage.
The following factors will affect the amount of your mortgage interest payments:
Most people use a mortgage calculator to determine mortgage interest for simplicity. However, you can calculate mortgage interest using a pen and paper as well.
Before proceeding with the calculation, you need to determine whether your mortgage rate is fixed or variable.
If you would like to calculate the interest over the course of a year, use the below formula:
Another factor that impacts your mortgage payment is whether you’re making principal and interest payments or interest only payments.
Susie is borrowing $700,000 to buy a house and she wants to save as much money on interest as possible. She decides to calculate the impact on the total cost of the mortgage using two APRs with a 0.25% difference.
If she can find a loan with an interest rate of 4% APR on a 30-year loan term, her monthly principal and interest payments will be $3,328.63. The total interest she will end up paying over the life of the loan is $498,307.00.
If Susie finds a loan with a marginally lower interest rate of 3.75% APR, her monthly payments will be $3,230.31 and the total interest over the life of the loan will be $462,915.00. With the lower rate, Susie will save $35,392.00 in interest costs.
Now that you know a bit more about how interest is calculated let’s look at the ways you can actually pay less of it.
Understanding how to calculate interest on a mortgage can save you dollars in the long run. Choosing the most competitive home loan and making extra payments can help you cut tens of thousands off the cost of your home.
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