How to Calculate Finance Charges on a Mortgage

Finance charges on a mortgage include all costs to the borrower to obtain the loan. Such costs can include interest payments (either prepaid using points or spread throughout the life of the loan); lender origination fees; appraisal, application or commitment fees; and mortgage insurance fees.

Instructions

1. Understand the idea of compound interest, which all mortgages utilize (as opposed to simple interest). The lender calculates interest monthly on the outstanding amount borrowed (principal), not once a year; therefore, the APR (annual percentage rate) is slightly higher than the stated yearly interest rate. For example, a loan advertised to have a 2.08 percent interest rate actually has an APR of 2.10% due to monthly compounding.

2. Calculate the monthly payment on your mortgage. Using a financial calculator (available online) or Excel, input the interest rate you expect divided by 12 (for monthly payments), the total number of payments to be made and the purchase price of the house. For example, in Excel you would type =PMT(.06/12, 360, -200000). This would calculate the payment of a $200,000 house at 6 percent interest for 30 years (360 months). You show the $200,000 amount as a negative because it is money you owe. The monthly payment in this problem comes to $1,199.10.

3. Multiply the total number of payments you owe by the monthly payment amount. In the above example, multiplying $1,199.10 times 360 equals $431,676.00. Subtract the amount you borrowed from this number to find out the total interest you paid ($431,676.00 minus $200,000 equals $231,676.00). As in this example, most people end up paying more total interest than the purchase price of their home when financing a house over 30 years.

4. Add the total amount of interest you paid to any other fees the lender charged you to obtain the mortgage plus any mortgage insurance. These amounts constitute the total finance charge for the mortgage.