Since high school, I have regularly sought out the interest of various single ladies, usually with little success. However, in my role as an advisor on real estate finance laws and structures, I now view the concept of “interest” quite differently.
Interest is the “extra” we pay when we return money to someone from whom we borrowed that money. Of course, if we are the lender, interest is the extra we get back along with the original loan amount.
Essentially, if we ask to borrow one dollar, we may promise to pay the dollar back in increments of 11 cents at 10 different times for a total of $1.10. The dollar is the “principal,” And, the “interest” is 10 cents, which is about 10%. However, the length of time that it takes to pay the $1.10 can make the “precise” interest rate slightly more or slightly less than 10%. Thus, calculating exact interest rates can be complex exercises in math for accountants and economists.
Interest rates are most generally discussed in two different ways. Interest earnings are often discussed in terms of “annual percentage yield” or APY. Interest payments are often discussed in terms of “annual percentage rate” or APR.
Most of us are aware that interest rates are currently at historic lows. Lower interest rates make purchases (that will certainly be financed) cost less than those purchases (that will certainly be financed) would cost if interest rates were higher.
The most common loans in our region are for real estate, especially for homes. In home loan situations, the most common loan structure is for a lump sum of money to be paid by a lender toward the purchase of a house. The buyer of the house then agrees to pay the loan back to the lender in equal monthly payments over 15, 20 or 30 years.
Each monthly payment pays the interest on the outstanding principal balance and a part of the principal. Thus, each month, the principal balance goes down a little bit. And, each month, the portion of the payment paid toward the principal increases.
For most home loans, a person can pay more toward their loan at various times or pay their loan off early to stop the interest accruing on the amount that is paid ahead. However, each lender handles the process of doing that differently, so it is important that any borrower who wants to pay ahead to avoid extra interest meets with that borrower’s lender in-person, in advance to ensure that the borrower and lender are on the same page.
When it comes to refinancing loans, there are many potential structures. Sometimes, the monthly payment is decreased. Other times, the duration (term) of the loan is shortened. Sometimes, too, loans are consolidated.
Although I have recently limited the scope of my interest in ladies to one, many of us may want to consider broadening the scope of our interest in refinancing loans while more attractive interest rates may still be available.
Lee R. Schroeder is an Ohio licensed attorney at Schroeder Law LLC in Putnam County. He limits his practice to business, real estate, estate planning and agriculture issues in northwest Ohio. He can be reached at Lee@LeeSchroeder.com or at 419-659-2058. This article is not intended to serve as legal advice, and specific advice should be sought from the licensed attorney of your choice based upon the specific facts and circumstances that you face.