![]() To calculate amortization, you will convert the annual interest rate into a monthly rate. Your interest rate (6%) is the annual rate on the loan.If your loan has a balance outstanding of $100,000 (not counting any accrued interest), that is the principal. For example, say you are paying off a 30-year mortgage. The principal is the current loan amount.In this case, you will calculate monthly amortization. To calculate amortization, you also need the term of the loan and the payment amount each period. You’ll need the principal amount and the interest rate. If you enjoyed this article, don’t forget to subscribe for updates here.Gather the information you need to calculate the loan’s amortization. Let’s plug those numbers into the formula:Īnd that’s it! It may not be as easy as a calculator, but it's quite possible to do yourself. If you can’t tell from the points above, this is a £350,000 mortgage at 3.3% APRC and a 25-year term. N = 25*12 = 300 (One payment a month for 25 years).r = 0.033/12 = 0.00275 (This is 3.3% interest: you need to divide by 100 to make it a usable number for this formula.).If we wanted to figure out the payment for an average mortgage, it might look like this: n = Number of payments in total: if you make one mortgage payment every month for 25 years, that’s 25*12 = 300.P = Principal (starting balance) of the loan.r = Annual interest rate (APRC)/12 (months).You’ll need these numbers to get started: Just remember, this doesn’t account for variable rates, which can change. What's the formula for calculating mortgage payments?įor the maths-inclined among us, the mortgage payment formula isn’t that complicated. The day your mortgage leaves this introductory rate, you’ll be paying a variable rate, and your payments can change every month! This is important because most mortgages have a fixed rate for a short period: 2-5 years, typically. These educated guesses are about as good as we can do: if you do figure out how to predict interest rates accurately, call us. Most banks just quote a “cost for comparison:” this is an educated guess of what your average interest rate will be if you stay on that mortgage. If you thought compound interest was tricky, variable rates are positively devilish. On a standard variable rate, the lender has total control over your interest rate. Usually, this variable rate is determined by the Bank of England’s bank rate, plus two or three percent. In a variable rate mortgage, your interest rate can change, often at the whim of the bank. We’ve been talking about fixed rates so far, where the interest rate doesn’t change. Imagine what would happen if it were a £400,000 mortgage over 25 years! (Hint: it’s not pretty) Tricky, right? This is also the reason interest rates are so important: if you had a 5% interest rate in the above example, you’d pay almost £1,000 more in interest. ![]() Notice how this is the exact size of your payment-that’s what makes the formula useful. ![]()
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. ArchivesCategories |