Home Loan Calculations
Working Out Your Home Loan Calculations
Applying for a new mortgage, or even just seeking a pre-approval for a home loan before you go house hunting, can be a bit nerve-wracking for many people. They’ll speak to a bank lending representative or a mortgage broker and find out how much they could borrow on their incomes. They’ll learn what the repayments will be each month. They’ll even ask about their interest rate. But that’s about as far as it goes.
Home loan calculations can be far more useful than many people realize. Aside from helping you budget for your repayment amounts, you can also use them to predict how much interest you’ll pay over the term of your mortgage term. You can also use them to reduce the loan term, increase your monthly payments or amend the way your mortgage is calculated.
Compare Interest Rates and Calculate Your Repayments
Let’s take a look at a few different home loan calculation scenarios:
Principal and Interest Payments
A standard mortgage payment is comprised of two portions: a principal component and an interest component. When you sit down and work out your home loan calculations using an online mortgage calculator, you get to see the end result. This is the minimum monthly payment due for the rate of interest your loan is charged at.
What you might not realise is that the payment amount you see will be paying an amount to cover the interest that could be charged as well as an amount that will pay down your principal balance a little.
This is known as amortisation. When banks make those calculations, they factor in a principal repayment in each payment you make that will ensure it takes you until precisely the end of the mortgage term to pay off what you owe.
If you’re handy with algebra, the calculation for working out your monthly payment is as follows:
M = A * ( R – 1 ) / ( 1 – R-N )
- M = monthly repayment
- A = Initial amount of the loan
- R = (1+i/12)
- i = interest rate per month
- n = number of months
Of course, this kind of calculation is made much easier by using a simple online mortgage calculator that can work all these things out for you.
Interest Only Payments
Not all loans are charged using principal and interest repayments. Some mortgage owners prefer to pay interest only on their loans and not repay the principal. Usually investors will choose to pay interest only on a mortgage. However, there are some types of mortgages that are charged interest only on the balance owed each month, such as lines of credit.
Working out the home loan calculations for interest only payments is quite simple and can be done easily on a regular calculator:
30 Day month:
Amount Owing x interest rate per annum% divided by 365 x 30 = interest due
31 day month:
Amount Owing x interest rate per annum% divided by 365 x 31 = interest due
Using Home Loan Calculations to Pay Off Your Mortgage Faster
Paying the bare minimum monthly payment due will mean it will take you the full amount of time you signed on your mortgage contract, whether this is 25 years or 30 years.
However, if you work out the home loan calculations to pay even a little more than the minimum payment due, you could cut your loan term down by several years and save yourself thousands of dollars in interest payments.
The same is true with working out fortnightly payments for your mortgage payments. Some people try hard to work out how many fortnights are in a year and then divide their monthly payment accordingly. This doesn’t give you the effect you want of paying off your mortgage faster.
Don’t do anything tricky with working out your fortnightly payments. Use a good home loan calculator to figure out your regular minimum monthly payment due and then just divide this number in half.
Pay this new amount every fortnight and you’ll see on your home loan calculations that you could cut a 30 year mortgage down by 6 years and save yourself tens of thousands of dollars in interest.
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