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Interest Calculation Formula:
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The formula I = P × R calculates the monthly interest payment on a mortgage, where I represents the interest amount, P is the outstanding principal balance, and R is the monthly interest rate (annual rate divided by 12 and converted to decimal).
The calculator uses the interest formula:
Where:
Explanation: This calculation shows how much of your monthly mortgage payment goes toward interest rather than principal reduction.
Details: Understanding how much of your payment goes toward interest helps in financial planning, assessing loan affordability, and making informed decisions about extra payments or refinancing options.
Tips: Enter your current mortgage principal balance and annual interest rate. The calculator will compute your monthly interest payment. All values must be positive numbers.
Q1: Why does only part of my mortgage payment reduce the principal?
A: In the early years of a mortgage, most of your payment goes toward interest due to the amortization schedule, with gradually more going toward principal over time.
Q2: How can I reduce the interest I pay over the life of my loan?
A: Making extra principal payments, refinancing to a lower rate, or choosing a shorter loan term can significantly reduce total interest paid.
Q3: Does this calculation work for all types of loans?
A: This formula works for standard amortizing loans. Interest-only loans or adjustable-rate mortgages may have different calculation methods.
Q4: Why is my interest payment decreasing over time?
A: As you pay down your principal balance, the interest is calculated on a smaller amount, so the interest portion of your payment decreases.
Q5: How often is mortgage interest typically compounded?
A: Most mortgages use monthly compounding, meaning interest is calculated monthly on the outstanding balance.