Written By: Glenn Michaels, Op-Ed Writer
Over the years I have been asked by borrowers, loans officers and others how to calculate the amortization of a mortgage. The calculation on a monthly basis is not difficult utilizing a conventional mortgage as long as you know certain variables.
If you know the note rate, the mortgage balance and the principle and interest payment the calculation is easy. Take the note rate and convert the rate by moving the decimal point. If the note rate is 5%, then move the decimal point to .05. If the note rate is 4.375%, move the decimal point to .04375. Whatever the note rate in use is the decimal point must be moved as shown. From this point we need to calculate the monthly interest rate factor.
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We need the monthly interest rate factor to determine the interest payment allocation of a mortgage payment. If we use a note rate of 5% or .05 and then divide .05 by 12 the monthly interest rate factor is .0041666%. If you then take the unpaid principle balance and multiply it by the monthly interest rate factor you will determine the interest allocation for the month.
If you know the principle and interest payment for the month and subtract the interest allocation that you calculated, the difference is the principle reduction for the month. If you have a fixed rate mortgage, the monthly interest rate factor will not change for the life of the loan. Each month the monthly interest rate factor is multiplied against the unpaid principal balance to determine the interest allocation. As the unpaid principle declines so does the interest allocation. If a borrower prepays along the way the monthly interest rate factor will be multiplied against the new balance again giving us the new interest allocation.
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As an example to see how the monthly interest rate factor works is below:
Mortgage Balance: $228,000.00 Interest Rate 5%, Term: 30 Years Principle and Interest: $1,223.95; Interest Rate Factor: .0041666%. Multiply each balance by the interest rate factor then subtract your interest allocation from monthly principle and interest payment to determine the principle allocation.
Balance Principle Interest
228,000 273.97 949.98
227,726.03 275.11 948.84
227,450.92 276.25 947.70
Borrower makes a $5,000.00 principal reduction
222,450.92 297.09 926.86
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After the lump sum principal payment is applied you can see the jump in principle allocation and the change in the interest allocation.
If an individual owns a financial calculator the calculator when calculating the above numbers utilizes the same factors but it can calculate the numbers over a longer period of time.
About The Author
Glenn Michaels - As an NAMP® Opinion Editorial Contributor, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
