04.01: Mortgage: Fixed Rate
Principal is the original amount of the loan.
Interest rate is the annual percentage rate that the bank or lending institution charges for the
service of loaning you money. The interest paid to the bank is also referred to as finance
charges.
Compounding periods refers to the number of times a bank charges interest during the year. For
example, if the bank charges annual interest, that means they charge interest once a year.
Similarly, monthly interest corresponds to once every month, and biweekly interest corresponds
to once every two weeks. Many other options are possible.
The time length of a loan or mortgage is the number of years it will take to pay off the loan or
mortgage.
Calculating a Monthly Payment
Naomi is calculating the monthly payment on a $150,000 mortgage at a fixed rate of 6% annual
interest for 25 years.
P equals $150,000.
n equals 12.
i is zero
point zero six divided by 12.
