How to Calculate Total Interest Paid on a Mortgage

A mortgage is a pledge via a legal document that gives property to the lender as security for payment of mortgage debt. Lenders use three Methods of Computation to calculate interest and principal payment for a mortgage. They are the add on, discount and remaining balance.

Difficulty:

Moderately Challenging

Instructions

1. Review and understand the interest computation methods. In the add on method, total interest is calculated by multiplying the entire loan amount by the interest rate, and multiplying the total interest cost by months and years life of loan. The interest is added to principal to determine the total amount to be repaid on the mortgage.

2. Discuss the discount method. Steps are the same as add on, but with an exception. The interest is deducted from the loan amount and the borrower receives the balance. The formula: I = A x ic x N.

3. Try the remaining balance method. The interest charge is computed by multiplying the contractual interest rate by the unpaid balance, times the loan period. This method is generally only used for short term loans. The interest rate is usually higher.

4. Try the simple interest calculation method. This formula is used in business to calculate interest. The formula is: Simple Interest = Principle x Rate x Time. The time must be in years. To convert from months to years, divide the number of months by 12. The number 12 illustrates the months in a year.

5. Understand the terminology. Interest is the fee paid by borrowers on a loan and is calculated using the percentage of the total loan. Principal is the amount the borrower owes on a mortgage.