How to Calculate Mortgage Interest

A mortgage is the amount of money a homeowner owes on his home. It is the largest and most prevalent debt that many consumers incur at least once in a lifetime. Like all loans from lending agencies, borrowing money is not free. There is a fee, called interest, that is calculated by the annual percentage rate (APR). This is paid each month along with insurance, taxes and some principal (the actual money borrowed). Knowing exactly how much interest you will pay during your entire lending period or how much interest is paid each month is important--especially when refinancing or purchasing a new home.

Things You'll Need

• Calculator

Instructions

Calculate Manually

1. Use the formula:
   M = P [ i(1 + i)^n ] / [ (1 + i)^n - 1].
   M is your monthly payment, P is your principal, i is your interest rate divided by 12 and n is the number of monthly payments for your loan period. ^ means an exponent.

2. Calculate i. If your rate is 6 percent, then divide 0.06 by 12. So, i equals 0.005.

3. Calculate n. If your loan is for 15 years, then multiply 15 by 12. So, n equals 180.

4. Solve [(1 + i)^n - 1]. Add 1 to 0.005, and now you have (1.005)^180 . Now use the x^y key on your calculator or use an online exponent calculator (see Resources), and the answer is 2.4540935. Subtract 1, which is 1.4540935.

5. Solve [ i(1 + i)^n ]. We already know (1 + i)^n is 2.4540935, but this time we need to multiply it by i (0.005), which equals 0.0122704675.

6. Know that your formula now reads:
   M = P(0.0122704675 / 1.4540935), or
   M = P(0.00844).

7. Solve M--your monthly payment. If your principal is $100,000, M = 100,000(0.00844), which equals a monthly payment of $844.

8. Calculate your mortgage interest. Take your monthly payment of $844 and multiply it by 180 (the number of months of your loan), which is $151,920. Next subtract your principal of $100,000 from that number. In this scenario, the interest you would pay on a 15-year loan for $100,000 at a 6 percent rate is $51,920.

Calculate Using a Mortgage Calculator

1. Calculate exactly how much money you must borrow to purchase your home. Include any closing costs that will be wrapped into the loan. Subtract your down payment, if any.

2. Visit an online calculator for mortgages. There are many mortgage calculators available online from sites like Bank Rate and Mortgage Calculator (see Resources).

3. Fill in your information on the online mortgage calculator. You need to know the principal amount that you will borrow, your interest rate and the loan period in years, usually 15 to 30 years. Click on the "Calculate" button.

4. Find the "Interest Paid" calculation in your results. Different sites will yield different kinds of results. On Your Mortgage Calculator, it simply gives your monthly payments, total payments and total interest paid. On Bank Rate, you see an amortization table in which you can read across to see how much of each monthly payment go toward principal and interest. You can also see how the interest you are paying is decreasing over time.

5. Find out how much interest you will pay over the entire lending period by scrolling to the bottom and finding the last set of calculations under "Total Interest."

Resources

• Bank Rate Mortgage Calculator
• MortgageCalculator.net
• Analyze Math: Exponent Calculator