When anyone is given a loan in the bank he or she is expected to pay interest on such loan and the same applies to a mortgage loan, a borrower or the buyer is also expected to pay interest on the mortgage loan, that is on the principal approved.
If you have a mortgage loan debt to pay and you are wondering on how to pull through this or you find it difficult to understand how the monthly mortgage loan repayment calculation is arrived at particularly how the monthly interest expense and principal repayment is calculated or deducted monthly.
As we all know, homeowner or the buyer of property which its purchase was financed by a lender or a mortgagee is obliged to pay a certain amount every month to pay down on his or her mortgage loan debt, that is on the interest and the principal.
I would love to walk you through how both the interest expense and principal repayment is calculated. There are several ways this is calculated but I will first like to show you a method that allows you to pay constant amount of principal repayment and interest expense on the mortgage loan debt.
Let say you got a National Housing Fund mortgage loan of #30m at 6% for 30 years to finance a property purchase. The first step to this is to know and understand how much you are expected to be paying on a monthly basis, to simply put it you must know your monthly mortgage payment after which you now calculate what goes for interest expense and your principal repayment.
And to do this, you must understand the following parameters :
M = Monthly Mortgage Payment
P = Principal Amount
I = Monthly Interest Rate
T= Terms of loan
n= Number of payment
pf = Payment frequency
L= Length of Loan
APR= Annual Percentage Rate
There are six steps to solving for the monthly mortgage payment :
Stage 1. Convert loan mortgage interest rate to decima
Using i = APR/100 = 6/100 =0.06
Stage 2. you now calculate monthly mortgage interest rate
Using I = i/pf = 0.06/12 = 0.005
Stage 3. Determine the number of mortgage payment to make
Using n = L* pf = 30 * 12 = 360 payments
Stage 4. You now calculate the terms of the mortgage loan
Using T = ( 1 + I ) ^n = ( 1 +0.005 ) ^ 360 = 6.02258.
Stage 5. Finally calculate monthly mortgage loan repayment
Using M = P [ ( I * T) / ( T – 1) ]
M =#30,000,000. [ ( 0.005 *6.02258) / ( 6.02258 – 1) ]
M = #179,880
Stage 6. Its time to know the total mortgage debt
Using M * n = #179, 880 * 360 = #64,756,800
We can then calculate the total interest owed by deducting the principal from the total mortgage debt. #64,756,880:00 – #30,000,000 = #34,756,800
The total interest owed is # 34,756,880:00.
Therefore our monthly interest expense is #34,756,880:00 / 360 = #96,546.666 while the
Monthly principal repayment is #30,000,000 / 360 = # 83,333.333
Let me reiterate that this method allows you to pay constant monthly mortgage payment provided the interest rate is locked at that six percent and if you look at it properly you will discover that the payment almost half the interest expense and the principal repayment.
To simply put it the monthly mortgage payment is #179,880:00 and the monthly interest expense is #96,546.67 while the monthly principal repayment is # 83,333.33.
If any payment is made on the mortgage monthly, it reduces both the principal and the interest owed on the mortgage loan like in the example above you must understand that the total principal owed is #30,000,000 while the total interest owed on the principal is #34756,800.
As you continue to make monthly mortgage payment the amount owed on the principal and interest is reduced over time till the mortgage is paid off and at the end of the mortgage the homeowner or the buyer must have paid a sum of #64,756,800 for about 360 months.
Let look at another method that allows much of the monthly mortgage payment to go into the payment of interest while the remaining is deducted from the principal to give the new principal that is used in calculating the next month interest expense and on and on like that till the loan is paid off.
Using the same example as above where our monthly mortgage payment is #179,800, to now calculate the first month’s interest expense we have #30,000,000 * 6 /100*12 = #150,000.
If our first month’s interest expense is #150,000 and our monthly mortgage payment is #179,880 then our principal repayment for the first month will be #179880 – #150,000 that gives #29,880. This amount reduces your principal to #29,970,120 that is used for the second months interest and principal repayment calculation.
If you compare these two approaches, you will observe that the second method allows you to pay much more of interest owed and less of principal owed while the first approach kind of allows you to pay almost the same amount as interest expense and principal repayment provided that the mortgage interest rate is locked at six percent.
Interest expense paid is #96,546.67 while principal repayment is #83,333.33
Interest expense paid is #150,000.00 while the principal repayment is #29,880:00.
With the second approach the interest owed may likely be paid off quickly because much of the monthly mortgage payment goes into interest repayment on the principal owed.
I know not many people love to see post with mathematical calculations like this and this explains why I have decided to make this post short and concise for easy understanding of how lenders or financial institutions arrive at your monthly mortgage loan payment figures and I think its worthwhile to know and understand the little calculations involve.
Let’s call it a day here today and till you hear from me next time stay blessed!
Best of Luck Beautiful Minds.
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