If you are purchasing or refinancing a home, figuring out the amount of interest on a mortgage loan will help you assess how much you have to pay for your home and help you determine how much you can use as a tax deduction. However, although it is not rocket science, figuring out a home mortgage interest can be confusing, especially if you have to read a pile of paperwork filled with legal terms that can cause your head to spin. Fortunately, working closely with your lender and using mathematical formulas will help you deal with this dilemma.
Items you will need
- Mortgage contract
- Mortgage statements
Determine Principal Amount
Determine and calculate the contract or purchase price of the house. Deduct cash discounts and other payment incentives, if applicable.
Calculate the principal amount of the home mortgage. Base this amount on the appraised market value of the house. Get as much information as you can from your real estate agent.
Add the principal amount of the house loan to the contract purchase price of the house.
Add all the related and closing costs considered as basis of property, which may include, among others, title fees, legal fees, document fees, transfer taxes and other government mandated fees and taxes connected to the sale of the house.
Reduce the amount further by deducting any down payments or other reservation fees made to secure or reserve ownership of the house.
Determine the monthly payment required to pay off the amount owed in a specific number of payments by using the formula M = P[i(1 + i)^n] / [(1 + i)^n - 1] divided by 12. M stands for the monthly payment, P is the amount of principal or the amount borrowed and i stands for the interest rate divided by 12 (number of months in a year) and n is the total number of payments. Use ^ to denote the power of n.
Plug in the numbers into the formula. The next steps will determine the interest using an example where the purchase price of the home is $400,000 with a 7 percent interest rate on a 30-year term.
Calculate the interest by dividing 0.07 (or 7 percent) by 12, which will result in 0.00583 or i = 0.07/12 = 0.00583.
Calculate the number of payments by multiplying 12 months by the number of years (30 years) to get 360 or n = 12 x 30 = 360.
Calculate (1 + i)^n by substituting 0.00583 for i and 360 for n to show (1 + 0.00583)^360. The answer is 8.10.
Calculate the monthly mortgage payment. M = P [(0.07)(8.10)] / [8.10 – 1] then, divide by 12 or M=400,000(0.0798)/12, which will result to M = $2,660.
Find the total mortgage interest paid for the period by subtracting the total payments for the period from the principal amount owed. Use formula (M x n) – P or ($2,660 x 360) – 400,000 = 557,600. The total amount of interest paid over the length of the term is $557,600.
- Use a free mortgage calculator available online for a more simplified approach. Often, lenders have this tool available on their website. A mortgage calculator provides optimum results and user-friendly instructions.
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