You make monthly payments on your mortgage. It has a quoted APR of 5% (monthly compounding). What percentage of the outstanding principal do you pay in interest each month?
Question
You make monthly payments on your mortgage. It has a quoted APR of 5% (monthly compounding). What percentage of the outstanding principal do you pay in interest each month?
Solution
The Annual Percentage Rate (APR) is the annual rate charged for borrowing and is expressed as a percentage that represents the actual yearly cost of funds over the term of a loan. This includes any fees or additional costs associated with the transaction.
However, in this case, the APR is compounded monthly. To find the monthly interest rate, we divide the annual rate by the number of compounding periods in a year (which is 12 for monthly compounding).
So, the monthly interest rate is 5% / 12 = 0.4167%.
This means that each month, you pay 0.4167% of the outstanding principal in interest.
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