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Daily Interest Formula:
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Daily interest calculation determines the amount of interest accrued on a mortgage balance each day. This is useful for understanding how interest compounds and affects your overall mortgage payments over time.
The calculator uses the daily interest formula:
Where:
Explanation: The formula divides the annual interest rate by 365 to get the daily rate, then multiplies it by the current balance to calculate the daily interest amount.
Details: Understanding daily interest helps borrowers see how quickly interest accumulates, make informed decisions about extra payments, and comprehend how mortgage amortization works over the loan term.
Tips: Enter your current mortgage balance in dollars and your annual interest rate as a decimal (e.g., 0.05 for 5%). Both values must be positive numbers.
Q1: Why divide by 365 instead of 360?
A: While some financial institutions use 360 days for simplicity, dividing by 365 provides a more accurate daily rate calculation based on the actual calendar.
Q2: Does this account for compounding?
A: This calculates simple daily interest. Actual mortgage interest typically compounds, meaning each day's interest is added to the principal for the next day's calculation.
Q3: How does this relate to my monthly payment?
A: Your monthly payment primarily covers the interest accrued during that month, with the remainder going toward principal reduction.
Q4: Can I reduce my daily interest amount?
A: Yes, by making extra principal payments, you reduce the balance on which daily interest is calculated, thereby reducing your overall interest costs.
Q5: Is the daily interest rate constant?
A: For fixed-rate mortgages, yes. For adjustable-rate mortgages, the daily interest will change when the rate adjusts.