Question:

Can you tell me how to calculate interest payments on my mortgage?

Answer:

Calculating interest payments on a mortgage becomes easy once you have a payment schedule. As there are a variety of mortgage types, having a payment schedule is the only common way to find out how much interest you pay in a month, in a year or over the whole mortgage period.

To calculate the interest payments on a mortgage you need to first know the following:

  • The type of mortgage (fixed rate, ARM, buy down etc.)
  • The value of the mortgage
  • The interest rate
  • The payback period

Once you have this preliminary information you can proceed to creating a monthly mortgage payment schedule. That schedule will give you your monthly interest payment as well.

Example of Calculating Interest Payments

Consider a fixed rate mortgage worth $80,000 at 7% interest to be paid back in 10 years. To create a payment schedule we will use MS Excel. By using the PMT()* function in Excel we get monthly payment to be $929.

Now we break this monthly payment into its two constituents that are the monthly interest and the monthly amortization:

  • Monthly interest is calculated by multiplying the monthly interest rate with the previous month's balance.
  • Monthly amortization is calculated by subtracting the monthly interest from the monthly payment

We can now create a table** in Excel similar to the following:

Year Month Principal Monthly Payment Interest Payment Amortization
1 0 $80,000 $0 $0 $0
1 1 $79,538 $929 $467 $462
1 2 $79,073 $929 $464 $465
.. .. .. .. .. ..
5 58 $48,209 $929 $285 $644
5 59 $47,561 $929 $281 $648
5 60 $46,910 $929 $277 $651
.. .. .. .. .. ..
10 118 $1,842 $929 $16 $913
10 119 $923 $929 $11 $918
10 120 $0 $929 $5 $923

* If you have MS Excel, you can find Monthly Payment in a minute. All you need to do is use the function PMT(i,n,P) where, i is the monthly interest rate, n is the number of months of the loan and P is the total value of the mortgage

** Due to the length of the table we will only show parts of it

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