|
|
Mortgage Amortization
By now, you know that a $100,000 mortgage isn’t necessarily going to cost you $100,000. In fact, a
30 year mortgage with a beginning principal of $100,000 and an interest rate of 4.5 percent will cost
you about $182,406.71 when all is said and done (presuming that you make all 360 monthly payments).
Where’d that $82,406.71 come from? Interest, of course. But it’s not just interest—it’s compounding
interest. After all, if you were charged 4.5 percent of $100,000 just once, you’d only owe $4,500 in
interest. But with compounding interest, you’re levied a finance charge each year which is tacked on
to the principal.
Your monthly mortgage payment is actually two payments: part of it goes towards paying down your
principal and the other part goes towards the interest. In the beginning, most of your mortgage
payment will be interest. The principal to interest payment ratio grows larger as you near the end
of your mortgage term because as your principal grows smaller, so too does the amount of interest
you accrue month-to-month.
Sound confusing? It kind of is. It’s easier to understand when you apply it to real life. Let’s say
you have a 30-year $100,000 mortgage with a 4.5 interest rate. (Note: 4.5 is your annual interest
rate. For calculations, you’ll want to figure your monthly interest rate by dividing it by 12—for
this example, it would be 0.045 / 12 = 0.00375). In order to find out how much you’d have to pay
each month, use the following formula:
M = P [ i(1 + i)n ] / [ (1 + i)n - 1]
Where
M = Monthly Payment
P = Principal
I = Monthly Interest
n = Number of Monthly Payments
So, we have
M = 100,000[ 0.00375(1 +.00375)360 ] / [ (1+.00375)360 – 1]
M = $506.69 (approximately)
That means in order to own your home free and clear within 30 years, you’ll have to pay $506.69 a month.
To understand how much interest your paying each month, simply multiply your monthly interest rate
by the outstanding principle.
First month’s interest = $100,000 x .00375 = $375
So, when you make your $506.69 monthly mortgage payment, $375 of that goes towards interest, leaving
you with $131.69 to apply towards your principal. To figure your new principal, subtract that amount
by your previous principal.
Next month’s principal = $100,000 - $131.69 = $99868.31
Now, you have to calculate interest all over again for the next month with your new principal.
Next month’s interest = $99868.31 x .00375 = $374.51
New balance = $99868.31 – ($506.69 – $374.51) = $99736.41
And so on....
If you wanted to build an entire amortization schedule, you’d have to do this equation 360 times. Luckily, you don’t
have to do that—you can use our mortgage calculator to build an amortization calendar which breaks
down how much principal and how much interest you pay each year. Plus, you can see how much you pay in total. To see
how much you’d save by paying off your mortgage early (and how big your monthly payments would have to be to do so),
simply change the loan term.
|
|
|
