Your Mortgage Payment - Go Figure

Many of us pay a home mortgage each month. But few of us understand how the payment is calculated. I know - no one told you there'd be math. But grab your calculator anyway and follow along.

Amortized loans (loans where the payment includes principal as well as interest) are generally due on the first day of each month. Unlike rent, where the amount you pay on May 1st is for use of the home from May 1st - May 31st, interest is paid "in arrears". This means that the payment made on May 1st is for the use of the funds from April 1st - April 30th.

The payment has two parts - principal, which helps to pay down the debt, and interest. The interest payment is calculated by multiplying 1/12 of the interest rate times the previous month's loan balance. Whatever is left after paying the interest is the principal, and your loan is decreased by that amount.

Let's assume a $100,000 loan at 6% amortized over 30 years with a monthly payment of $599.56. (The amortization term sets the monthly payment.) 1/12 of .06 (the interest rate) is .005. Multiply that times $100,000 and you get $500. So $500 of the payment goes to pay interest. The balance, $99.56, will be used to reduce the principal. Therefore, next month the loan balance will be $99,900.44.

The process repeats each month, but the portion of the payment allocated to interest gradually declines while the portion used to reduce the loan gradually rises. For example, the next month's payment is allocated as follows: interest due .005 times $99,900.44, or $499.51, leaving $100.06 as the amount available for principal reduction.

One thing to remember is that, while the payment may be "due" on the 1st, it usually is not "delinquent" until later in the month. That date can be as late as the 15th. A payment received by the delinquent date (in this example, the 15th) is treated exactly the same as if it were received on the 1st. So you can hold on to your funds for an additional 2 weeks without penalty. You do not want to incur a late fee so be sure to confrm your specific delinquent date with your lender.

Fortunately, your lender calculates your principal and interest allocations for you. But it's always good to know how it works - just in case you ever want to check the math!