By Updated June 29, 2018
When you commit to a mortgage, you are embarking upon a weighty financial obligation which provides numerous financial benefits in exchange for a regular monthly payments. In exchange for the opportunity to borrow, your mortgage will include either a fixed interest rate or variable interest rate over the life of the mortgage. In order to properly plan your finances, it helps to understand how you can calculate your monthly mortgage interest. With this information, you can learn how much of your payments are allocated to the principal on your loan and how much are merely paying for the privilege of borrowing.
Understanding the Different Rate Structures
In a fixed-rate mortgage, the interest rate for the life of the loan is established before any payments begin. There is only a single interest rate for the duration of the mortgage, regardless of what may happen in the future that could influence the rate. For many borrowers, this represents an attractive form of security. In a variable-rate mortgage, it is quite likely that your lender will outline a series of mortgage rate increases over the life of your loan, typically at periodic yearly intervals. Although your interest rate may change over time, you should be given the information you need to plan your finances well ahead of time throughout the life of the mortgage.
Calculating Your Monthly Mortgage Interest
In order to determine how much interest you will be paying per month on your mortgage, you will need to first convert your annual interest rate into a decimal-based monthly interest rate. In order to do so, you will first take your annual interest rate (for our example, let’s say 5 percent), and convert this to a decimal format by diving by 100. So, 5 divided by 100 is 0.05. Next, divide this figure by 12 in order to calculate your monthly rate. In our example, 0.05 divided by 12 equals 0.004167
In order to calculate your interest on your first month of payment, take the sum total of your mortgage and multiply it by the monthly interest rate conversion. If we had an $800,000 mortgage in San Francisco, our first month’s payment would include $3,333.60 in interest payments.
In order to calculate successive interest payments, you will need to first subtract your monthly payment of interest combined with principal from the balance of your mortgage and then repeat the process outlined above. As you continue to pay down the principal of your loan, the amount of interest you pay towards the mortgage will decrease in turn.