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Every month x dollars of my mortgage payment goes towards my principal and y goes towards interest. Since the mortgage rate is an APR, does that mean that for the whole year, x and y will be the same amounts? Or does the interest get calculated on a monthly basis?
For example, let's say for my very first mortgage payment I put $300 towards principal and $700 towards interest and my total loan is for $200,000. My APR is 4% (math doesn't add up but that's not the point) So, after my first payment I will owe $199,700. 4% of $199,700 will be less than 4% of $200,000, so if the interest is recalculated each month, then I should see the amount of money going towards interest to decrease each month right? If interest is calculated yearly and broken up into 12 payments, then no matter how much I pay towards my interest in the first year, I will still pay the same amount in interest? If this is the case, when would the Interest be recalculated? Every 12 months? At the beginning of the year?
Every month x dollars of my mortgage payment goes towards my principal and y goes towards interest. Since the mortgage rate is an APR, does that mean that for the whole year, x and y will be the same amounts? Or does the interest get calculated on a monthly basis?
For example, let's say for my very first mortgage payment I put $300 towards principal and $700 towards interest and my total loan is for $200,000. My APR is 4% (math doesn't add up but that's not the point) So, after my first payment I will owe $199,700. 4% of $199,700 will be less than 4% of $200,000, so if the interest is recalculated each month, then I should see the amount of money going towards interest to decrease each month right? If interest is calculated yearly and broken up into 12 payments, then no matter how much I pay towards my interest in the first year, I will still pay the same amount in interest? If this is the case, when would the Interest be recalculated? Every 12 months? At the beginning of the year?
Thanks in advance for your help!
Take the "Rate" not the APR and divide by 12. Multiple that by your balance and you get the interest. With a Mortgage you pay in what is called arrears. At the beginning of the month you have a balance of 200,000, that is when you calculate the interest. With a mortgage, where the payments are fixed, even if you pay down extra, the mortgage payment doesn't change.
If on the 1st day of the month and you own $200,000 and have a have a calculated interest of $700, then on the 30th you pay $200,000, you own $700 plus the interest of the current month of about $700 for $1400. If you paid of the loan on the 15th you'd own 700+350 to close the loan. These aren't real numbers as you have stated.
Last edited by thelopez2; 07-16-2014 at 02:08 PM..
Ohh ok! Makes sense. Let's see if I understood you correctly. The first month's interest is calculated by the rate/12*principal, then the following months interest is compounded daily? Like if I pay $1,000 extra on the 15th as opposed to the 30th, I would save a few dollars on interest for the next month?
I am mainly just trying to figure out the granularity of interest calculation. Is the interest always calculated once on the first of the month? Or does it accumulate every morning at 8am for the next month?
Technically mortgages are a specialized kind of INSTALLMENT LOAN. The calculation is a little involved but it results in EQUAL PAYMENTS FOR THE LIFE OF THE LOAN. For a typical 30 year fixed rate loan things are strictire with a decreasing amount going to interest and any increasing amount going to principal for each of the 360 payments so nearly the whole amount of the entire amount of the 360th payment going toward the last fraction of principal... Math Forum: Ask Dr. Math FAQ: Loans and Interest
Generally, lenders will NOT "reamortize" your loan. If you consistently make "accelerated" payments and specifically DESIGNATE THE EXTRA PAYMENT AS "FOR EXCLUSIVE PRINCIPAL REDUCTION" you will end up saving quite a bit in interest / shaving time off you repayment. Extra Payment Calculator | Accelerated Payments
Last edited by chet everett; 07-16-2014 at 07:45 PM..
Technically mortgages are a specialized kind of INSTALLMENT LOAN. The calculation is a little involved but it results in EQUAL PAYMENTS FOR THE LIFE OF THE LOAN. For a typical 30 year fixed rate loan things are strictire with a decreasing amount going to interest and any increasing amount going to principal for each of the 360 payments so nearly the whole amount of the entire amount of the 360th payment going toward the last fraction of principal... Math Forum: Ask Dr. Math FAQ: Loans and Interest
Generally, lenders will NOT "reamortize" your loan. If you consistently make "accelerated" payments and specifically DESIGNATE THE EXTRA PAYMENT AS "FOR EXCLUSIVE PRINCIPAL REDUCTION" you will end up saving quite a bit in interest / shaving time off you repayment. Extra Payment Calculator | Accelerated Payments
That's not true at all. You just need to contact them and likely pay a fee. I did it just a few months ago and mine was $250. They do require a significant principal payment though(10% in my case).
I agree they won't do it automatically though.
Also, I'm not sure why people always make such a big deal out of having to designiate the extra payment towards principal. Most banks have online payments. You type the number you want to pay towards the principal in the box for principal and you're done.
That's not true at all. You just need to contact them and likely pay a fee. I did it just a few months ago and mine was $250. They do require a significant principal payment though(10% in my case).
That's not true at all. You just need to contact them and likely pay a fee. I did it just a few months ago and mine was $250. They do require a significant principal payment though(10% in my case).
I agree they won't do it automatically though.
Also, I'm not sure why people always make such a big deal out of having to designiate the extra payment towards principal. Most banks have online payments. You type the number you want to pay towards the principal in the box for principal and you're done.
Don't be so flippant.
The reason it is imperative to make clear that you want the extra payment applied to principle is becuase if you don't do so the lender is under no obligation to do other than just apply that in a manner most profitable to their goal of maximizing profit. There are LOTS of people that find out that the lender is merely "stockpiling" the accelerated payments as if the borrower is going to "take time off" from paying on time. Of course that creates a nice accounting fiction that the lender still has the same "revenue stream" vs the reduced principle that actual hurts their future earnings...
Similarly PAYING to have the loan re-amortized after a signficant reduction of the principle (it typically takes years of regular payments to knock off 10% the principle ...) is a way the lender DISCOURAGES what is similarly not helping their profitablity. It literally takes a modern computers a few milliseconds to update this kind of info but if every borrower saw how much they could save by accelerating their paydown it would really impact the profit of lenders...
It is not so much the lender is "out to get" anyone as they use the terms the loan to maximize their profit / minimize their risk. They are NOT YOUR PAL!
Ohh ok! Makes sense. Let's see if I understood you correctly. The first month's interest is calculated by the rate/12*principal, then the following months interest is compounded daily? Like if I pay $1,000 extra on the 15th as opposed to the 30th, I would save a few dollars on interest for the next month?
I am mainly just trying to figure out the granularity of interest calculation. Is the interest always calculated once on the first of the month? Or does it accumulate every morning at 8am for the next month?
One of my old Notes said interest is calculated on 30 day months. Lets say you buy and close on December 20th, you will pay 11 days of interest at closing so if you borrowed $200,000, on January 1st your 200,000 will accumulate interest. Lets call it $700, so on January 1st your balance is $200,700. When you pay your $1000 on Feb 1,your new balance is ($200,700 - $1000) + another $700, so your Feb-1 balance is $200,400.
I'm sure there is some rounding error where the banks are making millions of pennies.
Typically that payment that is due on the 1st has a 15 day grace period so it isn't considered part of your actual "balance"
Last edited by thelopez2; 07-17-2014 at 12:14 AM..
Also, I'm not sure why people always make such a big deal out of having to designiate the extra payment towards principal. Most banks have online payments. You type the number you want to pay towards the principal in the box for principal and you're done.
I'd say most people don't let their mortgage company pull from their bank accounts. Some how the mortgage company is evil despite lending them hundreds of thousand, even millions based on a contract.
Last edited by thelopez2; 07-17-2014 at 12:12 AM..
It may depend on the bank and the particular loan. The interest could be calculated monthly or it could be calculated daily--depending on what the contract says and, most likely, based on what is most profitable to the bank.
When I serviced Land Contracts, I simply calculated interest monthly. The payment was first applied to interest (Principle x int % / 12) with the balance reducing the principal amount owed for the next month's payment. Regardless of whether the interest is calculated daily or monthly, however, each successive month should have less interest being paid and more principal being paid (provided you make timely payments and aren't subject to late fees and penalties). You should be able to verify the precise manner in which the payments are being credited by getting periodic statements of your account...and it's a good idea to also keep track yourself in case the bank makes a mistake along the way.
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Hmm, big difference between "not true at all" ...
