How to calculate monthly mortgage interest

Mortgage monthly payments remain the same for the entire term and are made up of two components: Principal payments and interest payments. At the beginning of the mortgage, the principal payments will only make up a very small portion of the monthly payment. As the mortgage progresses, the monthly mortgage interest will decrease, which increases the amount of money that goes towards paying down the principal. To calculate the monthly payment, you need to know your mortgage interest rate and your outstanding balance on your mortgage.

Determine the outstanding balance of your mortgage. This information is usually found on your mortgage statement. If not, contact your lender to obtain the balance.

Calculate your monthly interest rate by dividing your annual interest rate by 12. For example, if you annual interest rate is 7.5 per cent, your monthly interest rate is 0.625 per cent.

Multiply your monthly interest rate times your outstanding balance to determine your monthly mortgage interest. For example, if your monthly interest rate is 0.625 per cent and the outstanding balance was £86,450, £540.3 of your monthly payment will go towards paying down your interest.

Tip

Make sure that you remember to multiply the interest rate as a decimal. For example, if your monthly interest rate was 0.625 per cent, you would multiply by 0.00625. The monthly mortgage interest will change each month because the monthly payment exceeds the interest. For example, if your monthly payment is £650 and your monthly interest is £540.30, £109.60 reduces the principal of your mortgage. This will reduce the amount of interest charged in the next month.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."

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