Written By: Glenn Michaels, Op-Ed Writer
During my career very often I am asked if I pay additional money towards my mortgage will it pay off my mortgage faster or will it lower my monthly mortgage payment?
My answer is always the same; your mortgage balance will be lower and the amount that you will pay in interest charges will be decreased, the mortgage payment will remain the same.
When a borrower closes on a mortgage loan at a certain interest rate at that moment there is an interest rate factor assigned to that loan for the life of the loan. If the interest rate should ever change then the interest rate factor will also change accordingly.
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Each month when a borrower makes a mortgage payment the interest rate factor is multiplied against the unpaid principle balance to determine the interest amount that will be paid for the month. The remaining amount of the mortgage payment is then applied to principle and to escrow if there is an escrow account.
As the unpaid principle balance decreases the same interest rate factor is multiplied against the unpaid principle balance to determine the interest amount for each and every month. If a borrower makes a larger than normal payment to principal to reduce the unpaid principal balance then the following month the same interest rate factor will be multiplied against the unpaid principle balance to determine the new interest amount.
Determining ihe interest rate factor
Whatever your interest rate is move the decimal point and then divide it by twelve (12) to determine the monthly interest rate factor. Using any kind of calculator it is quite easy to make the calculation. If a borrower has a mortgage interest rate of 4% you convert the rate to appear as .04 and then divide .04 by 12 which equals .0033333. If a borrower has a rate of 3.75% convert the rate to .0375 and divide that by 12 = .003125. The interest rate factors shown are for just two mortgage rates; however whatever your mortgage rate is make the calculation to determine the interest payment for the month based on your interest rate.
If a borrower has an interest rate of 4.375% the interest rate calculation is .04375 divided by 12 or .0036458. This interest rate factor will be multiplied against the unpaid principle balance each and every month to determine the amount of interest to be paid.
The interest rate factor and a fully amortizing loan.
If a borrower has a 4.375% note rate the interest amount allocation will change each and every month as the balance declines. Below is an example how this works for a thirty (30) year loan at $200,000.00. The P & I payment is the calculated regular monthly payment for a $200,000.00 mortgage loan at a rate of 4.375%.
Beginning Balance interest rate factor P & I Payment Interest Principle
$200,000.00 .0036458 $998.57 $729.16 $269.41
$199,730.59 .0036458 $998.57 $$728.18 $270.39
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Every month for as long as the loan exists the interest rate factor will always be multiplied against the unpaid principle balance to determine the interest paid.
If a borrower pays a large chunk to pay down the mortgage but not paid off, the interest rate factor will still be multiplying each and every month against the unpaid principle balance. Using the example above and a $50,000 principle payment you will see how that works.
$149,730.59 .0036458 $998.57 $545.89 $452.68
$149,277.91 .0036458 $998.57 $544.24 $454.33
Now you know how amortization works.
About The Author
Glenn Michaels - As an op-ed writer, Glenn Michaels is a mortgage underwriting instructor for CampusUnderwriter (www.MortgageUnderwriter.org). As a BBA & FHA DE Underwriter, Glenn is a Pace University graduate who also graduated from New York University’s School of Mortgage Finance. Glenn has conducted numerous training classes and has worked in the mortgage banking industry for 38 years.
