SCHEDULED INTEREST VS SIMPLE INTEREST VS EFFECTIVE RATE – What’s The Difference?

Bobby Kurpinsky Uncategorized Leave a Comment

Scheduled Interest = Payments are credited to Principal and Interest on the due date and the monthly mortgage payment remains the same for the full term of the loan even if you pay extra.

Simple Interest= You pay interest based on the balance remaining at the end of the month. The more you pay monthly, the more your balance decreases and the less you pay in interest over the life of the loan. This in turn can save you ten and even hundreds of thousands of dollars in interest.

The banking industry knows that interest rate is what gets people’s attention. What most people don’t know is that the interest rate doesn’t do anything for you unless you keep your loan for the full 15, 20 or 30 year term. All it does is set the fixed payment that contractually requires you make that payment for whatever loan term you have. By no means does the fixed interest rate help you pay off the loan faster.

Effective Rate- The effective interest rate calculation is a measure of the actual interest you pay on your home loan by factoring in the front end loaded interest. The formula asks ‘what rate would I pay if I were to pay off my loan in x amount of years through a sale or refinance.’

If you have a Mortgage Calculator at home. PV= equity built in a given time, N=number of years being analyzed, PMT= monthly payments as a negative sum, CPT, then I/Y (interest/year)=your actual interest rate

$150,000 loan example

If you kept a 6% loan for 25 years you’d pay $270,000 over 25 years for $104,000 in equity or principal pay down for an effective rate of 9.4%

If you kept the loan for 15 years you’re really paying 24% in interest based on the calculation above. But wait it gets worse……….

Holding your 30 year loan for 10 years would result in an effective interest rate of 43%!

Holding it 7 years = 68%, 5 years, 102% and 3 years a whopping 182%. You get the point by now.

It scary to say the least that the average homeowner refinances or sells every 5 or so years! What if there was another way to turn this upside down and create true mortgage freedom, principal pay down and wealth through the use of a certain type of Simple Interest Home Loan?

Well there is and it’s called a Home Equity Line of Credit (HELOC)

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