When a loan is obtained, what must be repaid in installments is the amount collected and the interest due, which is the bank’s remuneration for the loan disbursed, and other related expenses. So how do you calculate interest on a mortgage? Let’s take a look. When a bank issues a mortgage, it can pay that amount in a lump sum, usually 80% of the amount paid for a home. Then, the borrower repays this sum in installments, including a portion of the principal and a portion of the interest representative.
Mortgage interest rates: what they are
Mortgage interest depends on three factors: principal amount assigned, type of interest rate, and interest rate percentage and duration of the loan . Furthermore, the interest can be simple or compound: This method is simple when the interest is always calculated on the fixed capital for the entire duration of the loan; When the interest is calculated annually on the residual principal rather than the initial principal, or when the accrued interest increases (if it has not been paid in installments) or increases or decreases due to the principal paid, compound interest.
So you need to understand the concepts of TAN and APR . The TAN (Nominal Annual Rate) is the “clean” rate of total expenditure. APR (annual interest rate) is the total interest, which is obtained by adding the TAN to the other mandatory expenses related to the loan (opening current accounts, business management, insurance coverage). It does not include professional knowledge, notarization and taxes. The rate applied can be calculated annually, semiannually, quarterly or monthly; this determination also affects the loan repayment plan attached to the loan agreement.
The amortization plan
The amortization plan corresponds to a detailed repayment plan of the capital that has been loaned to you, to which you will have to add the accrued interest. The installments that make up the amortization plan consist of principal and interest components . Their number is determined by the term of the loan. Principal is the amount of borrowed principal that must be repaid; the interest rate represents the amount of interest that you will have to pay for the capital that has been loaned to you. Although the installment payment amount can be fixed, the ratio of the principal to the interest rate of the installment payment changes continuously.
The borrowed money can be repaid by French or Italian amortization . In the first case, the capital is repaid in installments, the capital remains fixed and the interest rate decreases because it is calculated based on the residual capital. In terms of French amortization (the most common type), the installment payment remains the same, but internally the weighting of principal and interest changes over time. In particular, the interest share gradually decreases and the principal share gradually increases. In the French repayment plan, the installment payment was postponed because it provided that the payment had to be paid in installments at the end of each period.
In the progressive amortization plan , on the other hand, the paid-up capital amount is lower in the first period and then increases according to the geometric law. The capital increase corresponds to the decrease in interest, therefore the payment of the installment will remain unchanged, although in the first installment of the loan repayment mainly interest will be paid. To obtain and understand the amortization plan, it will be necessary to calculate the amount of the monthly mortgage payments.