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When calculating how much a monthly mortgage payment will be, we need to know three things:
Amortization is the word used to describe the process of regular monthly payments in which the interest being paid on the loan gradually decreases and the amount of principle that is paid off gradually increases. This is how it works: EXHIBIT A Loan amount/principle is $1,000,000, the interest rate is 8% and the amortization schedule is 30 years. We first determine how much the yearly rate of interest is, $1,000,000 x .08 = $80,000 Now we must determine the monthly rate, $80,000 / 12 months = $6,666 So, we know the breakdown on the interest - now we will do the same for the principle. $1,000,000 / 12 months = $83,333 monthly principle payment. Now simply add the monthly principle payment of $83,333 with the monthly interest payment of $6,666 for a grand first month payment total of $89,999 Here’s the problem: The initial principle was $1,000,000 – but the first monthly payment included $83,333 of principle, which means that this amount gets subtracted off the initial principle/balance. This means that the new balance is $1,000,000 - $83,333 = $916,667. And now we must repeat the entire process to calculate the second monthly payment total. $916,667 x 08 = $73 333 in yearly interest, or $6,111 in monthly interest payments. $916,667 divided by 12 months = $76,388 in monthly principle payments. Now add the principle and interest, or $6,111 + $76,388 = $82,499 grand second month payment total. Because we are on a thirty year schedule this process repeats itself 360 times (12 x 30 = 360) with the interest and principle constantly amortizing. Essentially one must do the following calculation for as many times as the amortization process calls for. 1. loan amount x rate 2. divide by 12 = monthly rate 3. loan amount divided by 12 = monthly principle payment 4. add monthly rate with monthly principle = monthly payment |
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