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What counts as mortgage interest and how do I calculate it?

By: ratetake

When an individual takes out a loan from a financial institution or establishment in order to fully or help fund the purchase of land or a residential building for the purpose of primary or secondary residency, this is known as a mortgage. This essentially boils down to the mortgage being money that a person owes when it comes to purchasing land or a building for residential purposes.

When individuals borrow money, the establishment or organization that funds the loan will charge the individual interest on the amount borrowed. Mortgage interest is any amount of interest paid on of the loans identified as mortgage for an individual to buy their home, a second mortgage for an alternate residency, a line of credit or a home equity loan. The money that the individuals need to repay for borrowing the loan, not including the loan amount, is the mortgage interest.

Calculating this amount can be a little tricky since there are different factors to consider for each individual loan. The first number that needs to be clearly defined is the overall amount of the loan. This is often the largest initial number for the formula. House loans can range from just a few thousand dollars to millions of dollars, and the amount is dependent upon the home or land being purchased. Next, individuals need their interest percentage. This can be a percentage or two, or less in some cases, or more than eight. Again, this will vary from individual to individual based on the standards and regulations as defined by the specific financial establishments.

For example, a person may get a $315,000 loan for their home. The bank may charge them a total of 6.5 percent interest. This number is calculated by multiplying the amount of the loan ($315,000) by the percentage turned into a decimal (.065). This amount is calculated to be $20,475.00. $20,475 is the amount of interest due for a single year. In order to calculate the overall amount of interest that the individual has already paid, they need to take their annual interest rate and multiply it by the number of years that they have been paying their mortgage. Individuals who are looking for the amount of interest that they will pay overall can multiply the annual interest by the total number of years that the individual has to pay off the mortgage. This number is specified in the loan and varies from loan to loan and financial establishment to financial institution.

A simple equation follows:

Loan Amount (L) x the Interest (I) = Annual Loan Amount (A) x Years (Y) = Total Interest (TI)

L x I = A
A x Y = TI

The interest percentage needs to be turned into a decimal. This is done by placing a decimal point two places to the left of the interest rate. For example, 6.5% becomes .065, 8.9% becomes .089, 3.2% becomes .032 and so on.

Typically, the higher a person's mortgage payment is per month, the lower their interest will be when compared to an individual who has a lower monthly payment and the same loan and loan repayment period of time. This is because individuals who pay their loans off faster have borrowed the money for less time. Therefore, they are able to pay the establishment back faster. The less time a person borrows money, the less interest they will be required to pay since interest is paid back over time.

Article Source: http://www.articlesinsight.com

Susan Duey represents, Best Mortgage Rate marketplace offering best refinance mortgage rate search for low mortgage rates from our network of accredited lenders. For more information please visit Mortgage interest and how do I calculate it

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