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
| Not at all | Definitely |
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