In economics, a general rule of thumb has always been: to know how you can afford a commodity or service before buying it. The same applies to mortgage loaning – before you acquire a house or property through a mortgage, you should calculate the mortgage interest payments and see how you can afford it and avoid going bankrupt.

Calculating one’s monthly mortgage interest payments has never been quite simple first-hand. That’s why we have both skilled personnel and mortgage calculators, amongst other methods, to do the hard work. But, it always comes in handy once in a while to understand how mortgages are calculated.

Mortgage loans have been very widely used to acquire a house or building or to refinance one. Not only is it a sure way to get a building you ordinarily may not be able to pay for all at once, but it also can prove to be a great way of reducing expenses to achieve other profitable investments.

What determines the loan available and mortgage interest payment structure?

Before we get to the mortgage interest calculation part, it is essential to understand that many factors come into play in determining the type and structure of mortgage loans, mortgage interest, and payments that are implemented.

Firstly, the amount of mortgage loan the borrower can get depends on his financial ability. Likewise, the interest rate (fixed or variable), the down payment, escrow, and others depend a lot on the borrower’s income flow stability, debt-to-income ratio, and credit score or report.

A stable rate of income flow and debt-to-income ratio of not more than 50% will better convince the lender that the borrower can fully pay the principal loan amount at the end of the mortgage period, thereby reducing the required down payment and interest rates. Fluctuating market values also determine the interest rate.

To calculate the mortgage interest due per month

This one comes quite easy; you just have to multiply the principal loan amount by the mortgage interest rate charged by the lender per annum and divide through by 12 to get the monthly payment.

Monthly Mortgage Interest  =  Loan Amount  x Mortgage Interest Rate /  12

So, considering a 15-year mortgage loan on a bread factory with a principal loan amount of N500,000 at an interest rate of 4%; we thus calculate:

Monthly Interest = N500,000   x   0.04      =   N16,667 per month

How to calculate the total monthly mortgage

This aspect requires a whole lot more detail. The mortgage amount you pay every month is apportioned into the principal, interest, and taxes, and insurance.  As the mortgage contract ages, more money paid every month ensues, decreasing principal and, in turn, decreasing interests.

Whether or not the taxes and insurance are part of the mortgage payment and thereby paid by the lender or paid directly by the borrower depends on if the loan structure involves an escrow account or not.

Calculate the monthly amount with this formula;

M  =    P  x   R  ( 1 + R )ⁿ   

         ( 1 + R )ⁿ – 1

Where M is the Monthly Payment;

         P is the Principal Loan Amount;

         R is the Rate of Interest

         n is the total number of payments per period.

Many borrowers consider only the monthly payment in the mortgage contract and fail to consider other important factors like; 

·  Amount of payment made to reduce subsequent payments

·  The interest paid monthly

·  Total interest to be paid in throughout the mortgage period

·  Comparing different loan offers considering the duration, interest rate, escrow, amortization rate, and so on.

Calculating payments and mortgage interest rates through other means

As earlier stated, calculating mortgage payments is much simpler than using an online mortgage calculator or a spreadsheet platform. You can look into deeper details like the total interest through the mortgage loan period.

When using online features to do the calculation, all you need to do is input the required values correctly; the calculator or spreadsheet does the rest. Spreadsheet software such as Excel is a great tool for this.

Using Excel for mortgage payment calculations gives you a better understanding of the system in determining the monthly payment and interest rate and the loan schedule. You examine the breakdown of the loan and compare or even construct a repayment schedule that suits you.

Over to You!

Great, you have that knowledge now. Knowing and understanding how to calculate mortgage interest rates is an added advantage to your skillset in marketing.

Needless to mention that whenever you don’t feel like it, you can just use the calculators or spreadsheets all available online. Calculating mortgage interest rates just got a whole lot easier and more interesting.