Mortgage Interest

Posted in Finance, Accounting and Economics Terms, Total Reads: 72
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Definition: Mortgage Interest

Mortgage Interest is the rate of interest charged on mortgage loans. Every loan has to pay an interest in addition to the principal, similarly mortgage loan also involves mortgage interest. To buy a home a person (borrower) takes loan from a bank or any other financial firm (lender), the person has to pay repay the loan along with the interest.


There are many different methods to calculate the mortgage interest rate paid. The interest rates may be fixed or rolling. In fixed interest rate, the rate remains constant throughout the lifetime of the loan repayment schedule. In rolling or variable interest rate the rate of interest changes during the lifetime of repayment of loan. In rolling interest rate or adjustable-rate mortgage, you can decide the rollover period with your lender and the interest rate will change after that rollover period depending upon the lender. Mortgage loan also gives the benefit of tax saving to the person as they are tax deductible.There are also Interest only mortgages in which the borrower has to make payments of interests up to the period of loan and then make the lump sum payment to repay the principal. In case of inability of the borrower to repay the loan, the lender forecloses/seizes the property.


The monthly payment in the fixed rate mortgage can be calculated by the formula:

payment= ((rate*principal))/(1-(1+rate)^-n)

 

For Example: If you buy a house for $200000 and you pay $100000 from your own pocket. Rest of the amount $100000 you take a loan from a bank with a fixed interest rate of 5% for 10 years.The interest is compounded annually and you will have to make monthly payments. The amortization schedule is as below:

Year

Principal

Interest

Balance

2016

$4,564.66

$2,589.92

$95,435.34

2017

$12,705.64

$7,446.81

$87,294.36

2018

$21,263.13

$11,617.18

$78,736.87

2019

$30,258.43

$15,349.74

$69,741.57

2020

$39,713.95

$18,622.08

$60,286.05

2021

$49,653.23

$21,410.66

$50,346.77

2022

$60,101.03

$23,690.73

$39,898.97

2023

$71,083.35

$25,436.27

$28,916.65

2024

$82,627.55

$26,619.93

$17,372.45

2025

$94,762.38

$27,212.97

$5,237.62

2026

$100,000.00

$27,278.62

$0.00


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