How to Calculate Mortgage

Interest

The interest on a loan is the amount of money you pay to a lender. Its
typically provided as a percentage, such that the interest rate is a given
fraction of the loan amount (principle). A mortgage loan is essentially a
special type of loan that uses real property as collateral. The loan
amount will, therefore, not exceed the amount that the seller pays for the
property. The interest on a loan may be calculated from the principle,
interest rate and length of the loan.

Edit Steps
Examine the Equation for the Mortgage Payment

1.

Calculate the payment on a loan with compounding interest by

using the equation M = P[i(1+i)^n]/[(1+i)^n -1]. M is the amount of the
payment, P is the principle, i is the interest rate and n is the number of
payments required to pay off the loan.

2.

2
Determine the total amount of money that will be paid. This will be
the product of the payment and the number of payments, given by Mn.

3.

Derive the total interest I that will be paid on the loan. This will be the
difference between the total money paid and the principle. This is given
by the equation I = Mn P. Using the solution for M given in step 1, I =
P[[in(1+i)^n]/[(1+i)^n -1] 1].

4.

Define n as the total number of payments required to pay off the

loan. Typically, the loan period is given in years, while the payments will
be made monthly. In this case, multiply the length of the loan by 12 to
get the total number of payments. For example, for a 20 year loan with
monthly payments, the total number of payments is 20 x 12 = 240.
Convert the Mortgage Interest

1.

Change the interest percentage into a decimal fraction by dividing

it by 100. For example, if the interest rate is given as 7 percent, its value
as a decimal fraction will be 7/100 or 0.07.

2.

Use the interest rate for the compounding period. A mortgage

interest rate is typically given as the annual rate, whereas the interest on
a mortgage loan is typically compounded monthly. In this case, divide
the annual interest rate by 12 to get the monthly interest rate. For
example, if the annual interest rate is 0.07, the monthly interest rate is
0.07/12. In this case, substitute 0.07/12 for i in the equation given in step
3.
Calculate the Mortgage Interest

1.

Determine the total interest payment on a $100,000 mortgage with a

length of 15 years and an annual interest rate of 5 percent. Assume
the interest is compounded monthly.

2.

Calculate the interest rate i. The decimal value of a 5 percent interest

rate is 5/100 or 0.05. Now divide 0.05 by 12 to get the monthly interest
rate of 0.05/12 or about 0.00416667.

3.

Calculate the number of payments as n = 15 x 12 = 180. Calculate

the term (1+i)^n as (1 + 0.05/12)^180 = about 2.1137. Use 100,000 for
the principle P of the loan.

4.

Solve the equation I = P[[in(1+i)^n]/[(1+i)^n -1] 1]. I =

100,000[[0.00416667 x 180 x 2.1137/2.1137 1] 1] = 42,342.85. The
total interest on this loan would be $42,342.85.