Calculate Mortgage Payment Based On Interest Rate – Mortgage amortization methods and tables are well known to accountants, real estate professionals, and other financial professionals. CPAs learn how to develop and use mortgage amortization in introductory accounting courses. Typically, novice bookkeepers calculate the period’s interest expense by multiplying the period’s effective interest rate by the outstanding loan balance, calculate the period’s principal amount paid by subtracting the period’s interest expense from the period’s total payment, and then calculate the new period’s balance Period calculate remaining mortgage. In the past, rounding errors inevitably occurred in the calculations when the author used the method described above. This article proposes another method to develop a depreciation schedule that minimizes or eliminates rounding errors.
The author suggests that instead of starting the amortization schedule to calculate the interest expense, a user starts by calculating the principal balance of the remaining mortgage. But before calculating a period’s interest expense and principal payment, how can you determine the remaining principal balance? Since a mortgage is a type of ordinary annuity, a user can calculate the present value of the annuity, or equivalently the remaining mortgage balance, using a present value of an annuity formula. The author uses a 36 month mortgage to demonstrate the above method and compares the proposed method to the more traditional method. The proposed method can easily be extended to longer periods; However, the author uses 36 months to simplify the presentation. Before calculating the amortization schedule, the author derives a monthly mortgage payment for an arbitrary example.
Calculate Mortgage Payment Based On Interest Rate
Attachment 1 shows the details of the mortgage and the calculated monthly mortgage payment: $9,816.49 calculated by the Excel PMT function. The mortgage payment is also calculated by manipulating the present value (PV) of a common annuity formula to solve for the monthly payment. Using a monthly interest rate of 0.375% and 36 total payments, the present value of a common annuity formula calculates the present value of $1.00 obtainable over 36 months as $33.6169, which is usually displayed as a present value factor (PVF) without the present value becomes dollars. Shield Dividing the 33.6169 PVF by the initial mortgage amount of $330,000 gives a monthly payment of $9,816.49. The formula entered in Excel is shown in line 11 of Appendix 1. (See the sidebar for deriving the present value of an ordinary annuity). The author used a ROUND function with two decimal places to match the usual monthly mortgage payments. Because the mortgage payment is monthly, the formula requires that the monthly interest rate of 0.3750% be used, and the interest rate must be entered in the formula in its decimal form of 0.00375.
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Fortunately, the same calculation can also be performed using Excel’s PMT function, as also shown in Figure 1. Note that PMT prepends the monthly payment with a negative sign and does not automatically round to two decimal places as required for mortgage calculations. PMT also requires an entry for the mortgage’s final future value (FV), which is zero in this example. The Mortgage Payment Type entry is zero to indicate that the payment is due at the end of the period, which in this example is the end of the month.
After calculating the monthly mortgage payment, a user can calculate the desired mortgage amortization schedule. A traditional depreciation schedule is shown in Appendix 2. Note that there is a rounding error of $0.18 at the end of 36 months; thus, interest expense is understated by $0.18 and principal paid is understated by $0.18. The author’s proposed depreciation schedule corrects for this rounding error, as illustrated in the following steps, which are illustrated in Appendix 3.
Figure 4 shows how to more easily obtain the same present value of an ordinary annuity using the Microsoft Excel PV function, shown in columns G and H. Column F, calculated using the formula described above, and column H, calculated using the PV Function. must be identical; Also note that the PV function prefixes the remaining principal balance calculation with a negative sign and does not round the output. The author used the ROUND function for two decimal places and inserted a negative sign in front of the PV formula to get the desired decimal output and converted the output to a positive number, as shown in column H.
The present value of an ordinary pension is derived using a cumulative method. With an ordinary annuity, payments are made at the end of the period (in this example, at the end of the month). The derivation takes place here with numbers related to the example, but can easily be extended to a general case.
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The actual value of $1.00 paid by the buyer or received by the seller using the numbers in the example equals $33.6169. The monthly payment is calculated by dividing the original mortgage balance by the calculated PVF of the ordinary annuity of 33.6169, giving a result of $9,816.49 (rounded to two decimal places).
Step 2 is to subtract cell F9 from cell C9 to derive cell E9 which is the principal paid for the current period. For January 2017, the calculation is: $330,000.00 – $321,421.18 = $8,578.82.
Step 3 is to subtract the principal amount paid for the current period from the monthly payment and enter the result in cell D9. For January 2017, the calculation is: $9,816.49 – $8,578.82 = $1,237.67.
Step 4 is to continue the process of steps 2 and 3 at the end of the amortization plan.
What Are Interest Rates & How Does Interest Work?
This article was co-authored by Ryan Baril. Ryan Baril is Vice President of CAPITALPlus Mortgage, a boutique mortgage and underwriting firm founded in 2001. Ryan has been educating consumers about the mortgage process and general finance for nearly 20 years. In 2012 he graduated from the University of Central Florida with a B.S.B.A. In marketing.
Interest on a loan is the amount of money you pay to a lender in addition to your principal (the amount you borrow). Interest is usually stated as a percentage, so the interest rate is a specific fraction of the principal amount. A mortgage loan is a type of loan used to finance the purchase of a property. You can calculate the interest paid on a mortgage loan based on the interest rate, the NPV (price of the property), and the loan terms (duration and number of payments). This can be done in a number of ways depending on the information you have and your personal preferences.
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This article was co-authored by Ryan Baril. Ryan Baril is Vice President of CAPITALPlus Mortgage, a boutique mortgage and underwriting firm founded in 2001. Ryan has been educating consumers about the mortgage process and general finance for nearly 20 years. In 2012 he graduated from the University of Central Florida with a B.S.B.A. In marketing. This article has been viewed 395,742 times.
To calculate mortgage interest, first multiply your monthly payment by the total number of payments you make. Then subtract the principal amount from that number to get your mortgage interest. For example, if you’re paying $1,250 a month on a 15-year loan, $180,000, first multiply $1,250 by 15 to get $225,000. So you have $180,000 left over from $225,000 to get $45,000, which is the entire interest on the mortgage. To learn the formula for calculating mortgage interest rates manually, scroll down! This is another comprehensive mortgage calculator. (See our pro calculator here.) This has a variety of charts to help you visualize how the table mortgage will pay off over the life of the loan. And it gives you a complete table of how payments count towards expenses and principal returns. You can also look at the impact of adding optional additional periodic repayments. This tool requires you to click CALCULATE before the results are displayed.
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