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 first month you pay 8%/12 (depending on the convention it could be 1/12 or [actual days in the month]/365 which is roughly 1/12 but varies from month to month). To keep it simple we’ll use the 1/12 convention in the numbers.
So, the first month the $500,000 note balance generates $3,333.33 in interest and the payment is going to be $3,668.82. Which means the next month the balance starts at this amount ($499,664.51). The next month the interest will be slightly less (because it’s now 8%/12 times the new balance) and the principal payment is slightly larger).
The idea is to give the borrower a constant payment that repays the entire loan after 360 payments or 30 years.
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