Effective interest rate for mortgage loan
With the $2000 downpayment and interest rate of 11.5% nominal compounded monthly the monthly payments would be $970.49 As you state, that is a monthly rate of 0.9583% Edit With the new information, taking the standard loan equation where Let Now setting s = 98000, with d = 990.291 solve for r
"The likely reason the mortgage is ""tricky to get"" is the adviser is probably recommending an interest-only mortgage in which there is no repayment of principle before maturity.  That would allow you to deduct the amount of the interest expense from your taxable income.  Your investment grows compound tax deferred and the principal invested (the mortgage balance) is completely tax free since it never qualifies as income for tax purposes. Example ideal scenario: Refinance $100,000 on a 5/1 ARM-interest only at 3%.  Invest the $100,000 at 6%.  Each year you effectively pay taxes on only the gains greater than interest.  If you reinvest the profits it looks something like: Net Profit:    $12,309 Effective Tax Rate:  13.21%" There's often a legal basis to answer this question. For instance, Austria (guessing from your profile) currently uses a 4% Statutory interest rate. You'll need to dig up not just the actual but also the historical rates. Note that you'll want the non-commercial interest rate - some countries differentiate between loans to businesses and loans to individuals. "Hey guys I have a quick question about a financial accounting problem although I think it's not really an ""accounting"" problem but just a bond problem.  Here it goes    GSB Corporation issued semiannual coupon bonds with a face value of $110,000 several years ago. The annual coupon rate is 8%, with two coupons due each year, six months apart. The historical market interest rate was 10% compounded semiannually when GSB Corporation issued the bonds, equal to an effective interest rate of 10.25% [= (1.05 × 1.05) – 1]. GSB Corporation accounts for these bonds using amortized cost measurement based on the historical market interest rate. The current market interest rate at the beginning of the current year on these bonds was 6% compounded semiannually, for an effective interest rate of 6.09% [= (1.03 × 1.03) – 1]. The market interest rate remained at this level throughout the current year. The bonds had a book value of $100,000 at the beginning of the current year. When the firm made the payment at the end of the first six months of the current year, the accountant debited a liability for the exact amount of cash paid. Compute the amount of interest expense on these bonds for the last six months of the life of the bonds, assuming all bonds remain outstanding until the retirement date.  My question is why would they give me the effective interest rate for both the historical and current rate?  The problem states that the firm accounts for the bond using historical interest which is 10% semiannual and the coupon payments are 4400 twice per year.  I was just wondering if I should just do the (Beginning Balance (which is 100000 in this case) x 1.05)-4400=Ending Balance so on and so forth until I get to the 110000 maturity value. I got an answer of 5474.97 and was wondering if that's the correct approach or not." Mortgage rates generally consist of two factors: The risk premium is relatively constant for a particular individual / house combination, so most of the changes in your mortgage rate will be associated with changes in the price of money in the world economy at large. Interest rates in the overall economy are usually tied to an interest rate called the Federal Funds rate. The Federal Reserve manipulates the federal funds rate by buying and/or selling bonds until the rate is something they like. So you can usually expect your interest rate to rise or fall depending on the policies of the Federal Reserve. You can predict this in a couple of ways: The way they have described their plans recently indicates that will keep interest rates low for an extended period of time - probably through 2014 or so - and they hope to keep inflation around 2%. Unless inflation is significantly more than 2% between now and then, they are extremely unlikely to change that plan. As such, you should probably not expect mortgage interest rates in general to change more than infinitesimally small amounts until 2014ish. Worry more about your credit score. Well, if you can get a loan for 3.8% and reliably invest for 7% returns, then you should borrow as much as you possibly can - the whole employment/existing loan situation doesn't even enter into it! But as they say, if something is too good to be true, it probably isn't (true). The 7-8% return are not guaranteed at all, but the 3.8% interest is. And while we're at it, 3.8% for an unsecured loan sounds pretty damn low, I would be really doubtful about that. I mean, why would the bank do that if they could instead invest the money for 7-8%? "For scoring purposes, having a DTI between 1-19% is ideal.  From Credit Karma:  That being said, depending on the loan type you looking at receiving (FHA, VA, Conventional, etc), there are certain max DTIs that you want to stay away from. As a rule, for VA, you want to try to stay away from 41% DTI. Exceptions are made for people with sufficient funds in the bank (3-9 months) to go to higher DTIs. If you keep a 19% utilization overall, that will get you a higher score but it will also show that you have a monthly payment on a particular revolving credit account. While the difference between 729 and 745 seems like a lot of points, there are rules as to how the interest rates are determined. So you will find that many banks have the same or similar rates due to recent legislation in Dodd-Frank. In the days of subprime mortgages, this was not the case. Adjustable rate mortgages did not necessarily go away, the servicer just has to make sure that the buyer can weather the full amount once it reaches maturity, not the lower amount. That is what got a lot of people in trouble. From ""how interest rates are set"": Before quoting you an interest rate, the loan officer will add on how   much he and his branch want to earn. The branch or company sets a   policy on how little that can be (the minimum amount the loan officer   adds on to his cost) but does not want to overcharge borrowers either   (so they set a maximum the loan officer can charge) Between that   minimum and maximum, the loan officer has a great deal of flexibility. For example, say the loan officer decides he and his branch are going   to earn one point. When you call and ask for a rate quote, he will add   one point to the cost of the loan and quote you that rate. According   to the rate sheet above, seven percent will cost you zero points. Six   and three-quarters percent will cost you one point. In our example, at 7.125% the loan officer and branch would earn one   point and have some money left over. This could be used to pay some of   the fees (processing, documents, etc), which is how you get a ""no fees   -no points"" mortgage. You just pay a higher interest rate. Where this scoring helps you is in credit card interest rates and auto loan and personal loan rates, which have different rate structures.  My personal opinion is to avoid the use of the credit cards. Playing games to try to maximize your score in this situation won't help you when you are talking about 20 points potentially. If you were at the bottom level and were trying to meet a minimum score to qualify, then I would recommend you try to game this scoring system. Take the extra money you would put on a credit card and save it for housing expenses. Taking the Dave Ramsey approach, you should have at least $1000 in emergency funds as most problems you encounter will be less than $1000. That advice rings true." The rules of thumb are there for a reason. In this case, they reflect good banking and common sense by the buyer. When we bought our house 15 years ago it cost 2.5 times our salary and we put 20% down, putting the mortgage at exactly 2X our income. My wife thought we were stretching ourselves, getting too big a house compared to our income. You are proposing buying a house valued at 7X your income. Granted, rates have dropped in these 15 years, so pushing 3X may be okay, the 26% rule still needs to be followed. You are proposing to put nearly 75% of your income to the mortgage? Right? The regular payment plus the 25K/yr saved to pay that interest free loan? Wow.  You are over reaching by double, unless the rental market is so tight that you can actually rent two rooms out to cover over half the mortgage.  Consider talking to a friendly local banker, he (or she) will likely give you the same advice we are. These ratios don't change too much by country, interest rate and mortgages aren't that different. I wish you well, welcome to SE. As mentioned, the main advantage of a 15-year loan compared to a 30-year loan is that the 15-year loan should come at a discounted rate.  All things equal, the main advantage of the 30-year loan is that the payment is lower. A completely different argument from what you are hearing is that if you can get a low interest rate, you should get the longest loan possible.  It seem unlikely that interest rates are going to get much lower than they are and it's far more likely that they will get higher.  In 15 years, if interest rates are back up around 6% or more (where they were when I bought my first home) and you are 15 years into a 30 year mortgage, you'll being enjoying an interest rate that no one can get. You need to keep in mind that as the loan is paid off, you will earn exactly 0% on the principal you've paid.  If for some reason the value of the home drops, you lose that portion of the principal.  The only way you can get access to that capital is to sell the house.  You (generally) can't sell part of the house to send a kid to college.  You can take out another mortgage but it is going to be at the current going rate which is likely higher than current rates. Another thing to consider that over the course of 30 years, inflation is going to make a fixed payment cheaper over time.  Let's say you make $60K and you have a monthly payment of $1000 or 20% of your annual income.  In 15 years at a 1% annualized wage growth rate, it will be 17% of your income.  If you get a few raises or inflation jumps up, it will be a lot more than that.  For example, at a 2% annualized growth rate, it's only 15% of your income after 15 years. In places where long-term fixed rates are not available, shorter mortgages are common because of the risk of higher rates later.  It's also more common to pay them off early for the same reason.   Taking on a higher payment to pay off the loan early only really only helps you if you can get through the entire payment and 15 years is still a long way off.  Then if you lose your job then, you only have to worry about taxes and upkeep but that means you can still lose the home.  If you instead take the extra money and keep a rainy day fund, you'll have access to that money if you hit a rough patch.  If you put all of your extra cash in the house, you'll be forced to sell if you need that capital and it may not be at the best time.  You might not even be able to pay off the loan at the current market value. My father took out a 30 year loan and followed the advice of an older coworker to 'buy as much house as possible because inflation will pay for it'.  By the end of the loan, he was paying something like $250 a month and the house was worth upwards of $200K.  That is, his mortgage payment was less than the payment on a cheap car.  It was an insignificant cost compared to his income and he had been able to invest enough to retire in comfort.  Of course when he bought it, inflation was above 10% so it's bit different today but the same concepts still apply, just different numbers.  I personally would not take anything less than a 30 year loan at current rates unless I planned to retire in 15 years. "Yes, the ""effective"" and ""market"" rates are interchangeable. The present value formula will help make it possible to determine the effective interest rate. Since the bond's par value, duration, and par interest rate is known, the coupon payment can be extracted. Now, knowing the price the bond sold in the market, the duration, and the coupon payment, the effective market interest rate can be extracted.  This involves solving large polynomials. A less accurate way of determining the interest rate is using a yield shorthand. To extract the market interest rate with good precision and acceptable accuracy, the annual coupon derived can be divided by the market price of the bond." In the US, our standard fixed rate mortgages would show no difference. My payment is calculated to be due on the 1st of each month.  When I first got a mortgage, I was intrigued by this question, and experimented. I paid early, on the 15th, 2 weeks early, and looked at my next statement. It matched the amortization, exactly. Mortgages at the time were over 12%, so I'd imagine having seen the benefit of that 1/2% for the early payment.  Next I paid on the last day before penalty, in effect, 2 weeks late. I expected to see extra interest accrue, again, just a bit, but enough to see when compared to the amortization table. Again, no difference, the next statement showed the same value to the penny. Your calculations are correct if you use the same mortgage rate for both the 15 and 30 year mortgages.  However, generally when you apply for a 15 year mortgage the interest rate is significantly less than the 30 year rate.  The rate is lower for a number of reasons but mainly there is less risk for the bank on a 15 year payoff plan. The key question is whether this number includes taxes and insurance. When you get a mortgage in the U.S., the bank wants to be sure that you are paying your property taxes and that you have homeowners insurance. The mortgage is guaranteed by a lien on the house -- if you don't pay, the bank can take your house -- and the bank doesn't want to find out that your house burned down and you didn't bother to get insurance so now they have nothing. So for most mortgages, the bank collects money from the borrower for the taxes and insurance, and then they pay these things. This can also be convenient for the borrower as you are then paying a fixed amount every month rather than being hit with sizeable tax and insurance bills two or three times a year. So to run the numbers: As others point out, mortgage rates in the US today are running 3% to 4%. I just found something that said the average rate today is 3.6%. At that rate, your actual mortgage payment should be about $1,364. Say $1,400 as we're taking approximate numbers. So if the $2,000 per month does NOT include taxes and insurance, it's a bad deal. If it does, then not so bad. You don't say where you live. But in my home town, property taxes on a $300,000 house would be about $4,500 per year. Insurance is probably another $1000 a year. And if you have to get PMI, add another 1/2% to 3/4%, or $1500 to $2250 per year. Add those up and divide by 12 and you get about $600. Note my numbers here are all highly approximate, will vary widely depending on where the house is, so this is just a general ballpark. $1400 + $600 = $2000, just what you were quoted. So if the number is PITI -- principle, interest, taxes, and insurance -- it's about what I'd expect. If the APR is an effective rate. If the APR is a nominal rate compounded monthly, first convert it to an effective rate. "add the interest for the next 5 payments and divide that by how much you paid on the principal during that time Let's see - on a $200K 6% loan, the first 5 months is $4869. Principal reduction is $1127. I get 4.32 or 432%. But this is nonsense, you divide the interest over the mortgage balance, and get 6%. You only get those crazy numbers by dividing meaningless ratios.  The fact that early on in a mortgage most of the payment goes to interest is a simple fact of the the 30 year nature of amortizing. You are in control, just add extra principal to the payment, if you wish.  This idea sounds like the Money Merge Account peddled by UFirst. It's a scam if ever there was one. I wrote about it extensively on my site and have links to others as well. Once you get to this page, the first link is for a free spreadsheet to download, it beats MMA every time and shows how prepaying works, no smoke, no mirrors. The second link is a 65 page PDF that compiles nearly all my writing on this topic as I was one of the finance bloggers doing what I could to expose this scam. I admit it became a crusade, I went as far as buying key word ads on google to attract the search for ""money merge account"" only to help those looking to buy it find the truth. In the end, I spent a few hundred dollars but saved every visitor the $3500 loss of this program.  No agent who dialoged with me in public could answer my questions in full, as they fell back on ""you need to believe in it."" I have no issue with faith-based religion, it actually stands to reason, but mortgages are numbers and there's order to them. If you want my $3500, you should know how your system works. Not one does, or they would know it was a scam.  Nassim Taleb, author of ""The Black Swan"" offered up a wonderful quote, ""if you see fraud, and do not say 'fraud,' you are a fraud.""  The site you link to isn't selling a product, but a fraudulent idea. What's most disturbing to me is that the math to disprove his assertion is not complex, not beyond grade school arithmetic.  Update 2015 - The linked ""rule of thumb"" is still there. Still wrong of course. Another scam selling software to do this is now promoted by a spin off of UFirst, called Worth Unlimited. Same scam, new name." For a short term loan, the interest is closer to straight line, e.g. A $10K loan at 10% for 3 years will have approximately $1500 in interest. (The exact number is $1616, not too far off). You will save 2.41% on the rate, so you'll the extra payment you'll send to the mortgage will save you about 10000*35*(2.41/12)/2 or about $350 over the 3 year period.