All homeowners should know how to evaluate a mortgage; whether you are financing a home purchase or refinancing your existing mortgage with a new loan, you are anticipating interest. Now, for the math that has been challenged, please know that it is not as difficult as you think.
How much-overloaded interest will determine when you want to make your first payment. Many borrowers prefer to pay their mortgage for the first of each month.
Some prefer the 15th. Sometimes lenders will choose that payment date for you, so ask if you have an advantage.
The interest is paid in arrears
In the United States, interest is paid in arrears. This means that your principal and interest payments will pay you interest for the 30 days immediately preceding your due date. If you are selling your home, for example, your foreclosure agent will order customer demand, which will also collect unpaid interest. Let’s take a closer look.
For example, say your payment is USD 599.55 on December 1st. Your loan is USD 100,000, with interest at 6% per annum and amortized over 30 years. When you make your payment by December 1st, you pay interest for the entire month of November, all 30 days.
If you close your loan on October 15, you will pay interest from October 15 to October 31 for the lender. It looks like you got 45 days for free before it was first made on December 1st, but you didn’t.
You will pay 15 days of interest before closing and another 30 days of interest when you make your first payment.
Calculating your main outstanding balance
If you want to know your unpaid principal balance remaining after you make your first mortgage, it’s easy to calculate. First, take your principal with a USD 100,000 credit balance and multiply it by times the 6% annual interest rate.
The annual interest is USD 6,000. Divide the annual interest rate by 12 months to arrive at a monthly interest rate. That number is USD 500.00.
Since you were depreciated on December 1, the amount of USD 599.55, to find out the major portion of that payment, you will deduct the monthly interest number (USD 500) from the principal and interest (USD 599.55). The result is USD 99.55, which is a major part of your payment.
Now subtract the USD 99.55 principal paid out of the USD 100,000 unpaid principal balance. That number is USD 99,900.45, which is the outstanding principal outstanding since December 1. If you are paying off a loan, you must add the daily interest on the outstanding balance until the day the lender receives the payment amount.
Note: With each successive payment, your unpaid principal will decrease by a slightly higher amount of the principal decrease over the previous month.
This is because even though the unpaid amount is calculated using the same method every month, your main portion of the monthly payment will increase while the interest rate will decrease.
You now know that your outstanding principal balance after December payment will be USD 99,900.45. To calculate your outstanding balance after January 1, you’ll be calculated using the new outstanding balance:
- 99,900.45 x 6% interest = USD 5,994.03 for 12 months = USD 499.50 interest for December. A January payment is the same as a December 1 payment because it is amortized. That’s USD 599.55. You will pay interest from USD 499.50 on December. That leaves USD 100.05 to pay off to the principal on your loan.
- The balance on December 1 is USD 99,900.45, deducting the bulk of your January 1 payment from USD 100.05. This amounts to USD 99,800.40 as your new unpaid principal balance.
Computing Daily Interest
To calculate the daily interest payments on your loan, take the principal interest balance and divide by 12 months, which will give you a monthly interest rate. Then divide the monthly interest by 30 days, which will be equal to your daily interest.
Say, for example, your uncle gives you USD 100,000 for a New Year’s attendance and you decide to pay your mortgage on January 5th.
You know you will owe USD 99,800.40 from 1. January. But you will also owe 5 days of interest. How much is that?
- USD 99,800.40 x 6% = USD 5,988.02. Divide by 12 months = USD 499. Divide by 30 days = 16.63 x 5 days = USD 83.17 interest for five days.
- You would send the lender USD 99,800.40 plus USD 83.17 in interest for a total payment of USD 99,883.57.