Your mortgage payment may remain the same from month to month, but the portions of it that pay principal and interest change each month as the principal -- the amount you still owe on your mortgage -- becomes incrementally smaller and you pay interest only on the remaining principal. As the amount you owe on the loan becomes smaller, so does your interest payment. The equation used to compute the interest portion of your mortgage payment in any given month is: current principal multiplied by annual percentage rate and divided by 12 months.
Write down the total remaining balance of your loan. You can find this amount on your monthly mortgage statement labeled "loan balance" or "principal balance."
Multiply your current loan balance by your annual interest rate -- also found on your statement and labeled "annual percentage rate" or "interest rate" -- and write that number down. For example, with a balance of $115,000 and an interest rate of 8 percent: $115,000 times .08 equals $9,200.
Divide the annual interest amount by 12 and write down the result. In the example, $9,200 divided by 12 equals $766. This is the interest portion of your current monthly mortgage payment.
Write down your monthly payment after subtracting any amounts that are earmarked for the tax or insurance escrows, mortgage insurance, or other non-principal monthly fees.
Subtract the monthly interest amount you calculated earlier ($766) from the monthly payment amount from Step 4 to learn how much of the payment will be used to reduce the total principal you owe on your mortgage. In the case of the hypothetical loan, if the monthly payment on your mortgage, excluding taxes and insurance, is $843, then $843 minus $766 equals $77. So the principal portion of that payment is $77.
Subtract the principal portion of the payment from the total principal owed on the loan to learn your new loan balance. In the example, $115,000 minus $77 equals $114,923. This is the amount on which you will be charged interest next month.
Items you will need
- For a full view of your entire loan amortization, use the Bankrate.com mortgage calculator (see Resources). Plug in your loan balance, interest rate and time to payoff -- most loans are designed for 30-year payoff -- then play with the numbers a bit to see how extra principal payments would accelerate repayment. In the case of the hypothetical loan, a one-time principal payment of $1,500 -- only one percent of the balance -- would reduce the time to payoff by 18 months and save around $15,000 in interest.
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