Simple Annual Interest - Real Estate loans use Simple Annual Interest. When we say simple Annual Interest, this means we do not have to use algebra, geometry, or calculus. All we have to use is simple addition, subtraction, multiplication, and division. If you have a hard time with these aspects of mathematics you might need tutoring for this section.
Basic Interest Formula: Interest = Principal x Rate x Time
When asked how much interest will be charged the borrower should use this formula. Paid interest is a percentage of the debt/principal owed by the borrower.
Interest-This is the dollar amount that a person has to pay to the lender for borrowing money.
Principal-This is amount of money/dollars that is borrowed. This is the amount of money owed the lender. This amount will reduce each month with the normal monthly payments.
Rate-This is the interest rate that the borrower has to pay the lender for the use of the lender's money. To work with a percentage, we convert the percentage to a decimal. The secret is to place a decimal in front of the percentage number to the left.
Working With Time
Time- Time comes into calculations regarding how long is the borrowed money subject to an interest charge? When working with a time factor, the time should always be shown in terms of years. Since there is not a time key on a calculator, we have to convert the time factor into a decimal or a percentage.
Examples: 1 year = 1;
2 years = 2;
1 1/2 years = 1.5;
6 months = .5;
3 months = .25
Converting Months - Months are figured by make a fraction. You place the number of months over 12 since there are 12 months in a year. Then you can convert the fraction into a decimal (%) portion of a year by dividing the top number by the bottom number.
Finding the Unknown
First of all, the opposite of addition is subtraction. The opposite of multiplication is division. If we normally multiply to get an answer...NOW we have an unknown number, we now have to divide; the opposite.
Isolate - You must also isolate the part you are looking for on one side of the equation.
Opposite - Crossing the equal sign means "do the opposite". If we normally multiply numbers with one formula, we would use division to get the other number.
NOW we have to find the Principal. So, we divide (the opposite of multiplication) to get our unknown which is the Principal.
Our new formula is: Paid Interest divided by the Rate X Time = Principal.
$200 divided by .05 = $4,000 X 1 (year) = $4,000 of borrowed principal.
Which type of interest is usually charged when financing a house?
A) simple annual
B) straight interest
C) compound interest
D) add-on interest
A corporation developing a new industrial park borrowed six million dollars, repayable in 8 years. At that time they repaid a total amount of $11,942,400. What was the yearly rate of simple interest charged?
A buyer gets a 50% loan on a new home at an annual interest rate of 11.3%. The first month's interest is $201.91. What is the purchase price of the home?
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