Things You'll Need:
- Financial documents
- Loan paperwork
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Step 1
Understand the vocabulary. Interest is the difference between the amount of money borrowed from a bank or financial institution and the amount of money repaid to that bank of financial institution over time. An annuity is a schedule of equal payment amounts divided by equal monthly intervals.
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Step 2
Understand the formula used to calculate the amount of interest that will be repaid. Interest equals principal multiplied by interest rate multiplied by duration. Keep in mind that principal is the total amount of money borrowed. Interest rate is the total percent repaid or accumulated during the year. Duration is the number of years spent repaying the loan.
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Step 3
Understand discount rate. The discount rate is the rate set by the Federal Reserve Bank, the central bank of the United States. It determines the rate banks and other financial institutions pay to borrow short-term funds from the central bank. The discount rate will determine the rate a financial institution charges a consumer.
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Step 4
Understand prime interest rate. The prime interest rate is the rate charged by banks and large commercial institutions to more credit worthy, large and well established business entities and corporations. Many large commercial institutions match the prime interest rate according to changes in the financial climate. The prime rate is the springboard for how home equity lines of credit and credit card rates will be determined and set for consumers.
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Step 5
Understand consumer interest rate. Consumer interest rate determines the mortgage rate you currently wish to repay. Consumer interest rate is determined by the prime rates. Typically, a mortgage line of credit is priced at prime rate plus 2 percent. This means, a consumer will pay 2 percent over the prime rate to borrow money.
