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
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.
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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.
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