In the add-on method, interest that a borrower has to pay is decided at the time when the mortgage loan is sanctioned. Multiply the principal amount by the interest rate and then multiply the resulting product by the life of the loan in months or years to calculate the total interest.
In this method, the interest that a borrower has to pay is withheld by the lender at the start. However, the amount that the borrower has to pay is equal to the principal amount.
For instance, if you were granted a mortgage loan of $100,000 for a period of 2 years at an interest rate of 10%, the total amount of interest that you will have to pay will be 100000 × 10% × 2 = 100000 × 0.1 × 2 = $20,000. This means that the lender will give you 100000 – 20000 = $80,000.
Simple interest method
Multiply the principal amount by the interest rate. Multiply the resulting product by number of payment periods. For instance, if the principal amount is $200,000, the interest rate is 10% every year and the borrower has to return the mortgage loan in 24 months which is 2 years, the total interest the borrower would pay would be 200000 × (10/100) × 2 = $40000.00
This means, that if you borrow $200,000 at an interest rate of 10% for a period of 2 years, you will have to return a total of 200000+40000=$240,000 to the lender.