How to Calculate Mortgage Interest for a Rent-to-Own Purchase

Spreadsheets are good ways to calculate interest payments.

Spreadsheets are good ways to calculate interest payments.

Renting to own a house can be a first step on the way to home ownership. Many rent-to-own agreements are structured so that you build up money toward the purchase of your house every month as you pay your rent. As you prepare to exercise your option and buy your house, you may want to calculate how much your mortgage interest will be to see what your new house will cost. Once you answer a few questions, it's a relatively simple process.

Your Home's Price

Before you can figure out what you'll spend on your mortgage interest, you will need to figure out what your house will cost. Generally, your purchase price will be the price set forth in your option, reduced by any option fees or additional rent. For instance, if you have an option price of $150,000 on your house and you paid a $4,500 option fee and $2,400 of additional rent, you've already paid $6,900 of your home's price -- $4,500 plus $2,400. Subtracting $6,900 from $150,000 gives you a net purchase price of $143,100.

Choosing a Mortgage Program

The mortgage program you choose will influence how much your interest costs and how much you have to put down. If you choose a government loan program like the FHA, VA or USDA mortgage, you will be able to buy with 3.5 or zero percent down and with relaxed qualifying terms. With a traditional mortgage, you generally have to put 20 percent down to qualify with no mortgage insurance but may be able to buy with as little as 3 or 5 percent down.

Down Payment and Loan Amount

Depending on the mortgage program you choose, the next step is to figure out your down payment. If you choose an FHA loan, your minimum down payment will be 3.5 percent. On a $143,100 loan, a 3.5 percent down payment is $5,008.50, leaving you with a $138,091.50 loan. Leaving closing costs out of the transaction for simplicity's sake, you can use that $138,091.50 figure as your loan amount, although if you'd like to get a more exact estimate, a lender can help you.

Interest and Principal Payments

One of the easiest ways to figure out your interest and principal payment is to use a spreadsheet. For instance, if you were taking out a 30-year loan at 4.75 percent for $138,901.50, the command would be "=PMT(4.75%/12,30*12,-138901.50)" and would give you a payment of $724.58, including both principal and interest if you entered it into a spreadsheet without the quotation marks. You can change the formula to reflect your particular loan by replacing the "4.75" with your interest rate, the "30" with the length of your mortgage in years and the "138901.50" with your loan amount. You can get the loan's interest rate from any lender. If you use Apache OpenOffice instead of Microsoft Excel, Apple Numbers or Google Spreadsheets, use semi-colons in place of the commas.

Interest and Principal Breakdowns

If you want to break the payment down to show only the interest, the command would be "=IPMT(4.75%/12,1,30*12,-138901.5)." The only change is that you added an "I" for interest in front of "PMT" and that you added a comma and a "1" between your interest rate and the length of the loan. That added number represents which payment you want to find the interest payment for. With a mortgage, you pay less and less interest every payment, so you can see how much interest you pay any given month by replacing the "1" with the month you'd like to see. You can also find your principal payment by substituting "PPMT" for "IPMT." The "P" stands for principal.

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About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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