When you have a mortgage, a bank or other financial institution in essence owns a portion of your house. The amount you actually own is the difference between the value of your home and the size of your mortgage. As you make your mortgage payments, some of your payment goes toward your bank's interest charges while some goes to pay your principal balance. Any amount that goes toward the principal buys back a small share of the bank's portion of your home. For a better understanding of how your mortgage payments work, use your mortgage's annum, or annual, interest rate.
Convert your per annum interest rate to a decimal by dividing the interest rate by 100. For instance, a 6.25 percent per annum interest rate would become 0.0625.
Multiply the decimal number by the total balance remaining on your mortgage. For instance, if you hold a $100,000 mortgage with a 6.25 percent per annum interest rate, multiply 0.0625 by 100,000 to arrive at $6,250. This is the amount you must pay your bank in interest every year.
Divide the amount you owe in interest by the number of payments you make per year. For instance, if you make your mortgage payments monthly, divide $6,250 by 12 to arrive at approximately $520.83. This is the amount you must pay your bank in interest every month.
Subtract the monthly interest payment you calculated from your actual monthly mortgage payment. The remaining amount represents how much money goes toward paying down your principal balance each month. For instance, if you pay $650 each month, subtract $520.83 from $650 to arrive at $129.17. This means that you have paid $129.17 that month toward the total amount of your mortgage.
Recalculate the amount of your payment that goes toward interest and the amount that goes toward your principal each month. If you pay $129.17 toward your principal one month on a $100,000 mortgage, it means that your mortgage is now only $99,870.83. Use this new value in your calculations to determine how much of your next monthly payment will go toward interest and how much will go toward your principal.
- Your actual annual percentage rate, or APR, may differ from your per annum interest rate because your APR takes into account additional fees your bank may charge. In this way, mortgages with high interest rates and low fees may be less costly than mortgages with low interest rates and high fees. Ask your bank for your mortgage's APR, or look at your statement to determine the fees that effectively increase your interest rate.
- Use a mortgage interest calculator (see Resources) to make the calculations automatically, or calculate your mortgage payments over a longer period of time.
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