Mortgage interest is a recurring payment made to the bank when a loan or mortgage is taken out. It is independent of other expenses, such as commissions and taxes. The interest rate is fixed at the time of applying for the loan and is usually the same throughout the life of the mortgage. However, the calculation of mortgage interest is done based on the type you choose. Well, some mortgages have variable rates that can change over time.
What are the interests of a mortgage?
Mortgage interest, also called mortgage interest, is a payment made to the lender as a return on money borrowed. From the bank to the mortgage broker, there are many sources of financing available. However, whenever you borrow money, you will have to pay interest. The amount of interest will depend on the interest rate (fixed or variable), the time to repay the money and the amount borrowed.
Mortgage interest is one of the most important factors to consider when applying for a loan. The best way to calculate it is using an online calculator, which will help you know how much money you will have to pay in your monthly installments. It is important that you choose a mortgage that suits you and your budget so that you can avoid any unexpected surprises in the future.
The interest rate is the amount of money you pay for the balance of your mortgage. It is usually expressed as a percentage and is determined by the lender. The interest rate is determined by two factors, the amount of money borrowed and the time it will take to repay that loan with the monthly payments.
How to calculate interest on a mortgage?
Calculating interest on a mortgage is a fairly simple process. First of all, you should know that the formula to calculate this rate is based on the term of your loan and its equivalent annual rate (APR). On the other hand, you must understand that interest is calculated based on the outstanding balance of the loan. This balance decreases with each payment. In such a way that, with each payment, the amount of interest decreases and more capital is returned.
The calculation of the mortgage interest consists of multiplying the amortization, by its annual rate (not its monthly rate!). These calculations change as payments are made and/or interest rates change.
For example: If an amortization of 1,000 euros over a period of five years is 5% per year, after one year you would have to pay 50 euros of interest (0.05 x 1,000).
On the contrary, if it is at 5% per semester or 2.5% per semester (twice a year), then you will have to pay 25 euros of interest twice a year, for a total of 50 euros, in one year ( 0.025 x 1,000) or a little less than 5 euros per month (25 euros / 6 months).
Calculate fixed rate mortgage interest
Calculating interest on a fixed-rate mortgage is very simple. The principal balance is the loan amount and interest is calculated monthly. It is based on the principal balance remaining after each payment.
The formula for calculating mortgage interest using the fixed rate method is:
Amount pending amortization x interest rate/12.
As it is a fixed mortgage, the monthly installment will always be the same throughout the time scheduled for the cancellation of the mortgage. In this type of mortgage, interest will decrease as payments are made until the last one.
Let's graph it with an example:
Imagine that you have a fixed rate mortgage at 2% of 200,000 euros for 25 years. The calculation would be:
- The calculation of the first installment would be: (200,000 × 0.02) / 12 = €333.333 of interest.
- For the second installment there would be: (198,988.23 × 0.02) / 12 = €331.65 of interest.
- In the third installment it would be: (197,976.46 × 0.02) / 12 = €329.96 of interest.
And so each one until completing 300 installments and subtracting interest from what remains to be amortized.
Calculate variable rate mortgage interest
The calculation of the interest of the variable rate mortgage is carried out in a very similar way as in the case of the fixed mortgage. The main difference is that it is the Euribor, the indicator that is used as a reference to perform the calculation. That is to say, that the interest rate subject its variations to the variations of this financial index.
So, the calculation method in both types of mortgage is the same, but in the variable mortgage the value of the interest rate is determined by the value of the Euribor.
What to take into account when choosing the mortgage?
There are many factors to consider when choosing a mortgage. Choosing the type of mortgage that best suits your needs is one of these factors, but not the only one.
The type of mortgage you choose should be based on:
- How long do you plan to stay at home?
- The expenses and commissions that go hand in hand with the granting of the mortgage loan.
- Your current financial situation and your future goals (ie, where do you see yourself in 5 years? Do you plan to have children soon?).
- The amount of money available for down payment and closing costs.
- The behavior of the Euribor index.
- The state of the economy in general.
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