MORTGAGE LOAN MECHANICS
As described above, mortgage loans traditionally are structured as fully amortizing debt instruments, with the principal balance being paid off over the term of the loan. For a fixed rate product, the loan’s payment is constant over the term of the loan, although the payment’s breakdown into principal and interest changes each month. An amortizing fixed rate loan’s monthly payment can be calculated by first computing the mortgage payment factor
using the following formula:
Note that the interest rate in question is the monthly rate, that is, the annual percentage rate divided by 12. The monthly payment is then computed by multiplying the mortgage payment factor by the loan’s balance (either original or, if the loan is being recast, the current balance).
As an example, consider the following loan:
|Monthly rate:||0.50% = 0.005|
|Loan term:||30 Years (360 Months)|
The monthly payment factor is calculated as
Therefore, the monthly payment on the subject loan is $100,000 × 0.0059955, or $599.55.
An examination of the allocation of principal and interest over time provides insights with respect to the buildup of owner equity. As an example, Exhibit 1.1
shows the total payment and the amount of principal and interest for ...