Question:

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

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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