If I borrow 100k at 5% interest, and to be paid back in 5 years, why is it not that case that I just pay 21k per year and would have paid 105k after 5 years? I heard that if I pay back a little extra every year, it will help to go pay off the interest first, what does that mean? If I owe a set amount of money on fixed interest, how can the total amount change?
In: 4
> 5%
5% is the Annual Percentage Rate (APR). You only did 5% once, not each year, so 5 times (but each time there is less money owed, so less interest money), and also it’s broken up by 12 so it’s applied each month.
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Here’s a monthly payment formula:
**p•[(r/n)•(1+(r/n))^(n*t)]/[(1+(r/n))^(n*t)-1]**
[Here’s a WolframAlpha link so you can play around with the variables.](https://www.wolframalpha.com/input?i=p%E2%80%A2%5B%28r%2Fn%29%E2%80%A2%281%2B%28r%2Fn%29%29%5E%28n*t%29%5D%2F%5B%281%2B%28r%2Fn%29%29%5E%28n*t%29-1%5D++%3B+with+p+%3D+100000+%2C+r+%3D+0.05+%2C+n+%3D+12+%2C+t%3D5)
$1887.12, so around ~$113k paid back.
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> I heard that if I pay back a little extra every year, it will help to go pay off the interest first, what does that mean? If I owe a set amount of money on fixed interest, how can the total amount change?
Interest is on remaining amount of originally borrowed money owed (the principal, $100k), so if you can make extra payments towards principal, the remaining interest will be less. Your monthly payments will be the same (except the last month’s) but it will be paid back in less time.
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Also, don’t forget property taxes and insurance, usually bundled together in an escrow, so your monthly payment will be even more. My mortgage is $755/mo but the escrow is $360/mo, and my HOA is $315/mo.
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