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Step 1
Determine the principal balance. This is the amount of money that you will borrow. It usually will not exceed the amount of equity you have in your house.
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Step 2
Calculate your monthly payment. This can be determined using a financial calculator. You need your interest rate, principal balance and the length of the loan term to determine this value. For example a $60,000 loan at 6 percent interest rate for 30 years, will have a monthly payment of $359.73.
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Step 3
Determine your monthly interest payment. At the beginning of your loan more of your payment will go toward interest and less toward principal and vice versa until the loan is paid off. Using our current example, the interest payment for the first month will be $300 ($60,000 x 6 percent / 12 months). This process is called amortization.
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Step 4
Prepare an amortization schedule based on the above. Therefore in the first month $300 of the almost $360 monthly payment will go toward interest and the rest toward principal. The principal balance in the second month is now slightly reduced and this continues gradually until the loan is paid off in the 360th month.
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Step 5
Use an automatic calculator. There are many online calculators that can automatically perform the above computations. Bankrate has a good one. There are also excel calculators that you can download for free and save on your computer for future use. See the links in Resources below.
