The Annual Percentage Rate (APR) is an interest rate that is different from the note rate. It is commonly used to compare loan programs from different lenders. The Federal Truth in Lending law requires mortgage companies to disclose the APR when they advertise a rate. APR does NOT affect your monthly payments. Your monthly payments are a function of the interest rate and the length of the loan. APR is a very confusing number! Even mortgage bankers and brokers admit it is confusing. The APR is designed to measure the "true cost of a loan." It is supposed to create a level playing field for lender by preventing them from advertising a low rate by hiding fees. If everything worked the way it should, all you would have to do is compare APRs from the lenders/brokers you are working with, then pick the lowest APR and you would have the right loan. Right? Wrong! Unfortunately, different lenders calculate APRs differently! So a loan with a lower APR does not necessarily translate to a better rate. The best way to compare loans in the author's opinion is to ask lenders to provide you with a good-faith estimate of their costs on the same type of program (e.g. 30-year fixed) at the same interest rate. Then delete all fees that are independent of the loan—such as homeowners insurance, title fees, escrow fees, attorney fees, etc. Now add up all the loan fees. The lender that has lower loan fees has a cheaper loan than the lender with higher loan fees. The reason why APRs are confusing is because the rules to compute APR are not clearly defined.
Simple interest is calculated on the original principal only. Accumulated interest from prior periods is not used in calculations for the following periods. Simple interest is normally used for a single period of less than a year, such as 30 or 60 days. Simple Interest = p * i * n where:
p = principal (original amount borrowed or loaned)
i = interest rate for one period
n = number of periods
Example: You borrow $10,000 for 3 years at 5% simple annual interest.
interest = p * i * n = 10,000 * .05 * 3 = 1,500
Example 2: You borrow $10,000 for 60 days at 5% simple interest per year (assume a 365 day year).
interest = p * i * n = 10,000 * .05 * (60/365) = 82.1917
Compound interest is calculated each period on the original principal and all interest accumulated during past periods. Although the interest may be stated as a yearly rate, the compounding periods can be yearly, semiannually, quarterly, or even continuously. You can think of compound interest as a series of back-to-back simple interest contracts. The interest earned in each period is added to the principal of the previous period to become the principal for the next period. For example, you borrow $10,000 for three years at 5% annual interest compounded annually:
interest year 1 = p * i * n = 10,000 * .05 * 1 = 500
interest year 2 = (p2 = p1 + i1) * i * n = (10,000 + 500) * .05 * 1 = 525
interest year 3 = (p3 = p2 + i2) * i * n = (10,500 + 525) *.05 * 1 = 551.25
Total interest earned over the three years = 500 + 525 + 551.25 = 1,576.25.
Don't know about Reducing Rates!
More info at links below. Final link is an APR calculator.
2006-09-16 18:45:58
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answer #1
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answered by uknative 6
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SUMMARY
The future value of a dollar amount, commonly called the compounded value, involves the application of compound interest to a present value amount. The result is a future dollar amount. Three types of compounding include: annual, intrayear, and annuity compounding. This article discusses intrayear calculations for compound interest.
For additional information about annual compounding, please see the following article in the Microsoft Knowledge Base:
141695 (http://support.microsoft.com/kb/141695/EN-US/) XL: How to Calculate Compound Interest
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MORE INFORMATION
Calculating Future Value of Intrayear Compounded Interest
Intrayear compound interest is interest that is compounded more often than once a year. Financial institutions may calculate interest on bases of semiannual, quarterly, monthly, weekly, or even daily time periods.
Microsoft Excel includes the EFFECT function in the Analysis ToolPak add-in. The EFFECT function returns the compounded interest rate based on the annual interest rate and the number of compounding periods per year.
The formula to calculate intrayear compound interest using the EFFECT worksheet function is the following:
=P+(P*EFFECT(EFFECT(k,m)*n,n))
The general equation to calculate compound interest is the following:
=P*(1+(k/m))^(m*n)
where the following is true:
P = initial principal
k = annual interest rate paid
m = number of times per period (typically months) the interest is compounded
n = number of periods (typically years) or term of the loan
2006-09-16 19:11:01
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answer #2
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answered by Anonymous
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I would suggest "investopedia.com" and " investorwords.com"
Mathematically
Amount = Principal * ( 1 + interest rate) ^ time [in yrs]
APR is annual percentage rate
compound interest rate is a bit more complex
Amount = Principal * ( 1 + r/t ) ^ (r*t )
where r is the interest rate
and t is the number of times compounded during a year
note the "^" symbol represents exponentiation
2006-09-16 18:12:14
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answer #3
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answered by Gemelli2 5
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APR means annual percentage rate and it is the percentage you will pay annually.
say you borrow $100 at 4% APR.
if you use simple interest then you pay $4 per year.
if you use compound rate then the interest will be compounded every year and added on to your principal, so the interest will be more every year.
2006-09-16 18:09:11
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answer #4
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answered by Anonymous
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They may use a different calculation method....and they can... Financial institutions over here in the states use Prime Rate... and LIBOR. As long as they disclose what method they use, they can use any formula they want. We have "truth in lending" laws over here, and in the find print they must disclose EXACTLY how they do their calculations. Its not "bamboozling". You are simply doing what others should be doing with all financial matters... PAYING ATTENTION........
2016-03-27 04:47:41
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answer #5
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answered by Elizabeth 4
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Try here:
https://www.uboc.com/personal/main/0,,2485_3012355,00.html
Might get all answers here, also
2006-09-16 19:03:57
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answer #6
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answered by K B 1
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