7

When I take a mortgage of 300 000 at 3% annual rate, will the 3% always be calculated on the 300,000? Or will it be calculated on the remaining principal? i.e if after a year, I paid off 15,000, the next calculation would be 3% based on 300,000 or 285,000?

11

Simple answer -interest accrues on the principal balance each month, which will decline by the prior month amount paid to principal.

Longer answer - You should search for a sample amortization table. It will clarify this for you and provide insight as to how principal is paid over time. You will see how much money it will take today to knock off one payment at the end of the loan. And you'll also learn why after 15 years, you are not halfway through the payoff amount. Maybe not even 1/3, depending on the rate.

| improve this answer | |
  • 3
    +1 Hidden in the simple answer is the notion that for a mortgage with a balloon payment that equals the original principal amount, that is, the monthly payments are interest alone with no reduction of principal amount owed, the interest will be calculated on the original (and unchanging) principal amount owed. – Dilip Sarwate Nov 5 '13 at 17:28
  • 5
    @DilipSarwate - YES. I assumed an amortizing mortgage. 10/15/30 whatever. Else, the notion of amortizing is lost. Although I suppose the way it's worded, I still claim the interest is on the principal, but if the principal isn't being paid, the interest wont be dropping. – JTP - Apologise to Monica Nov 5 '13 at 18:27
  • @JoeTaxpayer Don't forget the possibility of negative amortization, as we saw in the big housing bubble with interest-only or less-than-interest-only loans. (It doesn't change your answer, just adds another dimension.) – Istanari Nov 26 '18 at 19:25

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.