# Interest Cost

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## Interest Cost (IC)

A comprehensive and time-adjusted measure of loan cost to the borrower.

IC on a Mortgage: IC is what economists call an “internal rate or return.” It takes account of all payments made by the borrower over the life of the loan relative to the cash received up front. On a mortgage, the cash received up front is the loan amount less all upfront fees paid by the borrower. On an ARM, IC captures the effect of interest rate changes on the monthly payment and the balance, but future rate changes must be assumed.

Formula: IC is (i) in the formula below:

L - F = P1 + P2/(1 + i)2 +… (Pn + Bn)/(1 + i)n
Where:

L = Loan amount

F = Points and all other upfront fees paid by the borrower P = Monthly payment

n = Month when the balance is prepaid in full

Bn = Balance in month n

IC Versus APR: IC differs from APR in the following ways: IC is measured over any time horizon, whereas APR assumes that all loans run to term. IC may be measured after taxes whereas APR is always measured before taxes. On an ARM, IC can be calculated on any interest rate scenario whereas APR always uses a no-change scenario.

References in periodicals archive ?
By including the official measure of interest costs, the amendment's framers may intend to add incentives to lower both inflation and expenditures.
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Because the cost of an asset should include all costs incurred to prepare it for use or readiness for sale, interest costs related to the construction are generally included in the cost of the asset, that is, capitalized.
1) Therefore, any net interest cost savings due to the purchase of bond insurance should not be viewed as a result of signaling.
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The administrative burden of tracking the interest costs by project could exceed the revenue gain to the government from interest capitalization.
The effect on the APBO and the service and interest cost components of net cost of a one-percentage-point increase in the healthcare cost trend rate.
Bernstein, president of Acadia , said, "The Dime financing not only saves us over 100 basis points on our interest cost, but it provides a significant increase in flexibility for future strategic planning.
The interest rate resets quarterly and the initial rate is set at a pretax interest cost of 6.
Given relatively high level of debt and quite loose monetary policy, Hungary experienced the largest savings on annual interest costs (worth more than 1pp of GDP).
A WRU spokesman said: "Since 2006 the WRU has carried out two successful renegotiations with Barclays Bank plc which have allowed the governing body to make its banking arrangement far more flexible and to reduce its interest costs.

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