The Simplified Way To Calculate Your Loan Interest
Calculating mortgage interest isn’t as overwhelming as you think. With a few simple numbers, you can figure out how much interest you’ll pay on your mortgage as well as how much you may save by paying your mortgage off early.
Keep reading to learn how you can calculate the mortgage interest on your loan with a simple calculation.
Understanding Mortgage Interest
Mortgage interest is calculated monthly. The factors that determine the interest charges for the month include:
- Outstanding principal balance
- Interest rate
For example, if you have a $300,000 balance and a 4% interest rate, you’d calculate your interest as follows:
$300,000 x .04 = $12,000
$12,000/12 months = $1,000 interest per month
As you move forward with the loan, your principal balance will decrease as will the interest you pay. Using the example above, with a $1,432 mortgage payment (30-year term) your interest on the next month would be:
$300,000 – $432 (amount paid in principal) = $299,568 principal balance
$299,568 x .04 = $11,982
$11,982/12 = $998.56 in interest
You keep using this method moving forward in order to figure out your interest paid each month.
Daily Interest Calculations
If you are interested in paying off your mortgage, you’ll need to know the daily interest charges. If you request a payoff amount for today, for example, but don’t pay it off for another five days, the mortgage accrues interest for those five days.
We’ll use the same example as above with the $300,000 mortgage and a 4% interest rate.
With a full $300,000 balance, your daily interest charges would be:
$300,000 x .04 = $12,000
$12,000/12 months = $1,000 interest per month
$1,000/30 days = $33.33 interest per day
If you needed to calculate five days of interest it would be:
$33.33 x 5 = $166.65 total
You may need to know your interest calculations for a variety of reasons. For example, it can help you decide when to close on a loan. Since interest is paid in arrears, you’ll have to prepay the interest for the month that you close. Let’s say that you close on the 7th of the month. You’d have to come up with the cost of interest from the 7th to the 30th (or 31st depending on the month).
Let’s say your per diem interest is $33.33 per day. If you have 20 days of interest that comes out to a total of $666.66 in interest charges. If you closed on the loan at the end of the month and only had two days, though, it would cost $66.66 total in interest.
Knowing how interest affects your loan is important. It’s one of the largest charges you’ll pay at least for the first few years of your mortgage. Knowing how to calculate it can help you figure out if it makes sense to pay your loan off early or if you’re better off investing the extra money and just making the minimum mortgage payments as required.