Interest cost is another more flexible calculation of the total amount of interest paid on a mortgage loan. Most times the APR, or Annual Percentage Rate, is used because it is the most convenient. For anyone completing a mortgage term of, say, 30 years, this is ideal. For individuals in the market to stay in a home or a shorter, more prescribed time period, this is not a valid assessment.
APR is calculated using the original loan amount and subtracting lender fees, taking the same payment amount that was previously assigned and not changing it, therefore making the actual amount of paid interest and raising it. But that is under ideal conditions.
What makes the interest cost analysis more flexible is the third party fees, if subtracted from that loan amount is calculated in the equation for a truer amount. The interest cost can also be calculated over a period of a certain number of years. This would give a buyer a more accurate amount of the interest they would pay as long as they keep the loan.
On an Adjustable Rate Mortgage or ARM, the index will change before the prescribed fix period is complete and a new rate will then apply. Interest cost calculators, some of which are available online can consider this to provide a more accurate measure as well. What borrowers can do on an ARM is calculate how much interest they would pay if the rate changed to the maximum of the margin or did not change at all. Before choosing a loan it would be ideal to know how much will be paid in interest if your rate changes.
Interest cost calculations are much more accurate, even if they do require a little more work. They are not required by the federal government as Truth in Lending documents quoting the APR are, but might be more helpful to the consumer.