How Are Mortgage Repayments Calculated?
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Background Information
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Mortgage repayments are monthly payments made to pay down the borrowed principal, as well as interest on a home loan. Homebuyers considering various loan types should calculate their estimated mortgage payment to ensure they can afford the home. This method can also be used to help individuals to know how much of a home they can afford and which type of loan is best for them. The most common type of loan, the fixed rate mortgage, may be calculated in a few simple steps.
Determine Loan Term
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The loan term is the number of months or years the mortgage will be repaid over. Typical loan terms in the United States include 5-, 7-, 10-, 15- and 30-year loans. Once the loan term is determined, multiply the number of years by 12 to determine the number of months the loan will be repaid over. For example, in a 15-year loan term, there are 180 monthly payments.
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Decide on Interest
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The interest rate is another factor that must be decided upon before the mortgage payment can be calculated. A consumer may get a mortgage quote through his lender or various online applications. The interest rate is provided in an annual form. For example, an interest rate may be 6 percent APR. Calculate the monthly interest charged by dividing the yearly interest rate by 12. For example, a 5 percent interest rate equates to .004167 percent monthly.
Initial Monthly Payment
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The monthly payment for the loan above is $790.79. To calculate this, use the following formula: A= r(1 + r)n divided by (1 + r)n -- 1 multiplied by P. This payment is broken down farther, into what portion of it is paid toward principal and the amount paid toward interest on the loan. Using the information above, the first payment is $100,000 times 0.004167. Interest for the month equates to $416.70. Therefore, of the monthly $790.79 payment, $416.70 is paid toward interest and the remaining $374.09 is applied to the principal of the loan.
Second Month
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The process continues each month over the course of the loan. In the second month, the principal owed to the lender is $100,000-$374.09 or $99,625.91. The interest is calculated against this amount. $99,625.91 times .004167 equals $415.14. This means that in the second month, the monthly payment of $790.79 is broken down into $415.14 paid to interest and $375.65 applied to principal.
Continuations
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The process continues month after month until the loan has been paid off. The monthly payment on a fixed-rate mortgage doesn't change throughout the term of the loan. Yet in an adjustable-rate loan, the fluctuating interest rate may change over time, depending on whether the lender increases or decreases the rate.
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