Mortgage

How To Calculate Mortgage Interest

Mortgage

When getting a mortgage loan, an interest rate is usually attached to it. The interest rates could be called the mortgage interest. It is typically provided as a percentage, such that the interest rate is a given fraction of the loan amount. The interest on the loan may be calculated from the principle, interest rate and length of the loan and determines the mortgage interest rate.

The main reason why there is a calculation made for interest rate is because when you calculate what amount of interest you are going to pay upon a given amount of loan, it helps you in budgeting and also avoiding errors that may occur when you know what your interest rate payment is.

The mortgage interest can be calculated to know either what your interest payment is going to be at the end of each year or at the end of each month and for future budgeting, you can calculate to know the total interest payment that will be made at the whole entire period of the mortgage loan. Take for instance, you might have a loan of 100,000 dollars at 5% annually and you might want to calculate what will be your interest payment at the end of each month and if the loan is set for a 15 year period, you can also calculate the total interest that is going to be paid for the whole of the 15 years.

To calculate mortgage interest, there are different methods on which you can use to estimate or determine your mortgage rates; which includes:

1. Examine the equation for the mortgage payment: under this method, there are three steps that are strictly followed to determine the interest rate based on the full entire period of the mortgage loan. They include:

• Calculate mortgage payments with compounding interest by using the equation M = P {I (1 + i) ^ n} / (1 + i) ^ n-1. Where ‘m’ is the amount of the payment, ‘P’ is the principle, ‘I’ is the interest rate and ‘n’ is the number of the payments required to pay off the loan.

• Determine the total amount of money that will be paid. To calculate this, you multiply the payment and the number of payments that are going to be made for the entire mortgage period. For example, if the monthly payment of a mortgage loan is 500 dollars and is paid in the period of 15 years monthly, converting the years to months, 15 years is multiplied by 12 and that is equal to 180, which means that the payment which could be represented by ‘M’, if multiplied by 180 which is represented as ‘n’ will give the total amount of payment you are going to make. Solved mathematically;

Monthly payment (m) = 500
Number of years = 15
Number of payments (n) = 15 x 12 = 180
Therefore, total amount of money to be paid is = 500 x 180 which is 90,000.

• Derive the total interest ‘I’ that will be paid on the loan: this is the difference between the total money paid and the principle. Represented in an equation; I = Mn – P

2. Convert the mortgage interest: under this method are two vital steps that must not be missed to calculate your interest rate payment based on a monthly basis. The steps are;

• Change the interest percentage into decimal fraction by dividing it by 100. For example, if the interest rate for a mortgage loan is given as 5%, its value as decimal value can be gotten by dividing 5 by 100 and that equals 0.05.

• Use the interest rate for the compounding period: when you want to get the interest rate on a monthly basis, whereas, the interest rate is usually given in an annual rate; you divide the annual interest rate by the number of months in a year which is 12. For example, if the annual interest rate is 5% and converted to decimal is 0.05, the monthly interest rate can be gotten by dividing 0.05 by 12 which equals 0.041667 and therefore 0.041667 is your monthly interest rate.

They are many other methods to calculate your interest rate but the above two methods are the most widely used. It is important to know that calculating your interest rate doesn’t just helps you in budgeting but also gives you an idea on what type of mortgage loan that could likely be most beneficial to you.

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