What is simple interest? How to calculate it for your home loan


How do you find the principal amount in simple interest?

Your principal amount is the original amount you borrowed, which will be available on your mortgage documents. You can also subtract the amount of your down payment from the selling price of your home to determine how much you borrowed to buy your home.

  • Principal = sale price of the house – down payment

Alternatively, you can adjust the simple interest formula to determine the principal amount if you know your interest rate, number of payments, and interest paid. When you divide (interest rate x number of payments) on either side, you isolate the primary variable to create this formula:

  • Principal = (simple interest) / (interest rate x time)

What is the compound interest formula?

Compound interest is a little trickier to calculate, but you can use this formula to figure out how much interest you’ll pay over the life of your loan:

  • A = P (1 = (r / n)(after)
    • A = interest paid
    • P = initial principal
    • r = interest rate
    • n = number of times interest is charged per period
    • t = number of periods

Is simple interest good or bad?

Simple interest is not good or bad, but whether it is preferred over compound interest depends on its application to debt or investments.

Simple interest costs less than compound interest, so if you’re taking out a $350,000 loan for your dream home, simple interest is better for your budget.

However, if you calculate the interest yields for your 401(k), compound interest will produce greater growth, so you will earn more money on your investment.

Is the annual percentage rate good or bad?

Again, APRs are neither good nor bad. They are just another way of conditioning your interest rate to include additional lender fees, closing costs, or other costs associated with borrowing money.

The APR is based on simple interest. There is also an Annual Percentage Yield (APY), which is based on compound interest as well as the additional costs of borrowing money. Either can be applied to your mortgage, although the APR is the more affordable option.