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Mortgage loans carry simple interest, and calculating how much of your monthly payment is credited to interest and how much of that payment is applied to principal, is really simple.
Suppose you borrow $150,000.00 to finance your new house. You apply for and get approved for a 30 year fixed rate mortgage at 4.25%. The monthly payment is $737.91.
To figure how much of your first month’s payment is applied to principal and how much to interest, multiply the loan amount of $150,000.00 by .0425 (4.25% interest), then divide that amount by 12 (12 months in a year). Out of your first month’s payment of $737.91, $531.25 goes to interest, and $206.66 is applied to reduce the principal.
Month two is calculated exactly the same, however in month two you only owe the bank $149,793.34 because of the first month’s principal reduction. So, $149,793.34 X .0425 = 6,366.22/12 = 530.52 – 737.91 = $207.39 to pay down more principal. That’s a little over a dollar more that is applied to the principal in just the second month. At that rate you’ll have the mortgage paid off in 30 years!
Seriously, by knowing how a loan works, you understand how even a small increase or decrease in interest rates can affect you.
When dealing in real estate, the more you know about the basics, the better you will be able to judge what is best for you and your family. You, as the buyer, deserve to have a sound grasp of the details in what usually is the biggest purchase you’ll ever make.
