Many people when they go to purchase a house are looking to finance that purchase and yet very few people understand exactly how the interest works on their mortgage. So, what I want to do is take a few minutes and demonstrate exactly how the interest amount is calculated on a mortgage.

We are going to look at a property where the purchase price goes like this below, I just keep the math easy.

## 30-years Loan

- Purchase Price - $100,000
- Down Payment - 20%
- Principla - $80,000
- Interest Rate - 5%
- Monthly Payment: Monthly principel and interest - $492.46

In other to pay off a loan with those terms in 30-years, our monthly principal and interest is that amount right there.

**$492.46.**

Now, in other to calculate the interest on this, this is what we will do.

We are going to take out our original loan balance for our first payment which is going to be $80,000, and we are going to multiply that by the interest rate which is 5%, then we will divide that by 12 for the months of the year, which gives us an interest payment for the first month of $333.33.

- Interest Due 1st Payment: (Loan Balance x Interest Rate)
- $80,000 x 5% / 12 = $333.33

Alright, we know we are paying $333.33 an interest in the first month, and now we will see how much that leaves our payment towards the principal.

Now, we take our monthly principal and interest payment amount which was $429.46, we subtract the interest due which we just calculated of $333.33 and that leaves our principal due on our first payment of $96.13

- Principal Due 1st Payment: Monthly P&I - Interest Due
- $429.46 - $333,33 = $96.13

When we add these two numbers together we get our principal and interest payment of $429.46

- Total Due 1st Payment (P&I): Principal + Interest
- $333,33 + $96.13 = 429.46

Loan Balance After 1st Payment = $79,903.87

Which you can see is the amount that we were told in the very beginning. After our first month's payment, our loan balance which started at $80,000 is now down to $79,903.87.

Although you paid 429.46, your loan balance only decreased by $96.13, because that was the only amount that actually went towards the principal.

**Second Month**

Now, lets do one more month here and look at our second payment, we would use the same math, we are going to take our loan balance which is the new amount of $79,903.87, we multiply that by the interest rate of 5% and then again we divide it by 12 = $332.93. And now you will see that the interest due our second payment is down to $332.93, which is a 40% decrease from on the first payment

- Interest Due 2nd Payment: (Loan Balance x Interest Rate)
- $79,903.87 x 5% / 12 = $332.93

For the principal on the second payment will do the same process and we subtract our monthly principal and interest payment of $429.46, we subtract the interest due which we just calculated and that gives us the principal due on our second payment of $96.52, so, the principal has gone up by 40%.

- Principal Due 2nd Payment: Monthly P&I - Interest Due
- $429.46 - $332.93 = $96.52

Again we add those two together and it is again 429.46.

- Total Due 1st Payment (P&I): Principal + Interest
- $332.93 + $96.52 = 429.46

Loan Balance After 2nd Payment = $79,807.35

**Points To Remember**

- Each month your interest paid will decrease and the principal paid will increase.

- On the very first payment that is the highest amount of interest that you will ever pay on your mortgage and each month those numbers will change in favor of the principal being paid, it won't change by much but it will change a little bit. And of course, the main benefit of a mortgage is that unlike rent your monthly principal and interest will never change.

Although the interest the principal ratio changes each month, your actual monthly payment does not change ever.

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