How Is Mortgage Interest Calculated?

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Mortgage interest is calculated in two different ways, one being a principal and interest mortgage, which is a set rate payment method, and the other being an interest-only mortgage, where the lender only requires the minimum interest to be paid every 30 days. Understand how interested is calculated on a loan with tips from a mortgage broker in this free video on mortgage loans.

Part of the Video Series: Mortgage Tips & Information
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Video Transcript

Hi this is Matt McKillen with Innovative Financial Group. The question that's been posed to me today is how is mortgage interest calculated? Generally there's two types of mortgage interest calculations on a mortgage. You can have either a principal on interest fully amortized mortgage or you can do what's called an interest only mortgage. The principal and interest mortgage is basically whether you're doing a 15, a 10 or 30 year term, it's a set rate payment and on an amortization schedule the principal is reduced on the loan out of every payment with on the front end the mortgage the majority going to interest, but it is set to pay in full over the term of the loan. The interest only mortgage is usually where the bank only requires that you pay at least the minimum interest that's due on the mortgage every 30 days. Now on a mortgage, the interest is calculated on an interest bearing basis which means that every month that you have the mortgage open they calculate your interest charge based on the outstanding balance. So on an interest only loan, your mortgage will not payoff in any set term every payment whereas a principal and interest loan whether it be 10, 15, 20, 30 years, if you make the minimum payments you will payback all the interest over the life of the mortgage plus the principal that was borrowed. Again my name is Matt McKillen, I'm with Innovative Financial Group.

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