Mortgage Basics
There are several key variables in a mortgage to consider when calculating your mortgage payment. You can use various online mortgage calculators to help you calculate your payments using several combinations of these variables.
Interest rate
The rate of interest paid by the borrower to the lender for the use of the money.
Amortization period
The time required to payy off the principal balance through regularly scheduled principal repayments.
Term
The period of time during which the money is loaned at a certain interest rate. This is usually anywhere from 6 months to 1 to 5 years.
Compounding method (daily, monthly, semi-annually, annually, etc.)
Defines the formula by which the total interest is calculated.
Payment frequency
How often payments are made whether monthly (12 times per year), bi-weekly (26 times per year) or semi-monthly (24 times per year).
Prepayment options
Terms of the mortgage which define how much and how often additional payments can be made against the principal amount without penalties.
To understand the basic elements of a mortgage we need to look at an example using the terms outlined above. If you bought a house for $200,000 using $50,000 of your own money and borrowed the remaining $150,000 the opening principal balance would be $150,000. Assume the mortgage was at 5 percent - interest rate for a 5 year - term, with a 25 year – amortization period. Your monthly payments would be $872.41.
The way you can determine what your monthly payments are is to use an amortization schedule using the variables we defined. You can find mortgage calculation programs on many websites.
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