How are interest and monthly payments calculated on a 30 year fixed rate mortgage loan?
Suppose there is a 30 year loan of 500,000 at 8% interest.
Would that 8% interest have to be paid each year for whatever amount is still left? Ex. 8% of 500,000 is 40,000, so the first year we would have to pay 40,000 in interest, then the next year about be 8% of whatever principal is left, so if 20,000 went to principal we have 480,000 left on the loan and 8% of that is 38,400 paid in interest only the second year.
Or is it calculated differently.
Thanks!
In: 208
The best way to look at it is this.
Mortgage payments have two parts. The principal and the interest.
The principal is the loan itself and the interest is the fee the lender charges. So let’s say you have a loan amount of 200,000 with an interest rate of 6%. You are making monthly payments. So you would use this calculation.
6% = .06
So take .06 and divide by 12 since we are making monthly payments.
.06 / 12 = .005
take .005 and multiply it by the remaining principal of the loan.
.005 * 200000 = 1000
So your first months interest ould be $1000
1/12th of the interest rate is applied each month because the 8% rate is **per year** and there are 12 months in a year.
For example, in the first month $500,000 x 8% x 1/12 = $3,333.33 in interest.
Your math is roughly correct.
if it’s 8% interest on a 500,000 loan, then 0.8% * 500,000 = $40,000 year 1. $40,000 / 12 months = $3,333 per month. So you’d pay that amount per month, in interest alone. Add to that principal, taxes, and insurance.
That is fuzzy math because it’s not counting that each month you reduce the principal slightly so in February the 8% is on a slightly smaller value than January’s was.
It’s “amortized” to be a simple interest calculation.
It’s the remaining balance, times by the APR (broken up monthly).
I had a $168k mortgage at 3.5%.
$168000 * (3.5%/12) = $490.00 of interest.
And checking my mortgage account, that’s exactly how much the interest was. The principal was $264.40, so the loan balance is lowered to only $16773.50, and the next month’s interest is calculated on that.
____
To calculate the total fixed monthly (interest+principal) you need to use a formula:
* Principal * APR %/12 * (1+ APR %/12)^((number of months)) / [(1+APR %/12)^((number of months)) – 1]
For example for mine:
168000 * 0.035/12 * (1+ 0.035/12)^(360) / [(1+0.035/12)^(360) – 1] = $754.40
As stated, my first month’s interest was $490 and the principal was $264.40, which makes $754.50; each month the monthly stays the same but the interest portion decreases and the principal portion increases.
It will be calculated monthly. This is why paying even a little extra each month can make a big difference over the term of the loan.