Remember if you want to annualize it, you need to multiply it by m = 12,

and that works out to be 16.6% annually.

Now this is the nominal rate you're paying.

You're not paying 10%, you're actually paying 16.6%.

And you might say, hey wait a minute,

there's another formula you showed us earlier on.

And that formula,

if I remind you, is taking into account the compounding within a year.

That is the effective annual rate formula.

And that was 1 plus the nominal rate,

R, divided by M raised to the power M minus 1.

Hey, what if we plug these numbers in our formula what do we get then?

Well what we get is an effective rate of one plus the nominal

rate,16.6 divided by m which is 12.

Raise to the power m, minus one.

Figure this out and what do you get?

You get pretty close to almost 18%.

The exact rate is 17.92 or about 18%.

Now, mortgage payments on financing a home are typically computed using

the same amortization procedure as I have described.

The difference is the size of the loan and the time period.

For a house you typically borrow 100 times more than an iPhone, and your loan would

therefore be outstanding for much much longer, maybe ten times longer.

Instead of three years, it would be lasting for 30 years.

We saw earlier that the key variable that is constantly changing and

affects the value of the transaction is the interest rate.

So if you look at this amortization schedule very small changes

in the interest rates will have a very large impact on your payment schedule.

This is why home owners have recently been on kind of a spending spree in many parts

of the world as interest rates or mortgage loans have historically never been lower.

Some banks in Canada, for example, are lending at about 2 percent on a thirty

year loan, and you can actually fix this rate for five years.

Can you imagine that?

Historically we've never seen this happen before.

Rates are even lower if you have a variable rate loan.

Let's step back for a moment and take a look at the big picture...

The housing and commercial real estate market is huge