Software figures mortgage balance

By John Adams

For the AJC

If you’re like most homeowners, you make monthly loan payments to your mortgage lender. And the last week in the year is a great time to see what progress you’ve made toward paying off that loan.

For today, let’s agree to exclude non-loan expenses that may be included in your required monthly remittance. Fees such as taxes and insurance are “escrow deposits” and are not directly related to the monthly loan payment you make.

Remember that your monthly loan payment consists of two parts: principal and interest. If your loan has a fixed rate, the monthly payment of principal and interest is likely fixed for the life of the loan.

The interest is the cost you pay for borrowing the money. The interest charge is calculated by multiplying the current loan balance by your interest rate, then dividing by twelve. That interest charge is deducted from your monthly payment each month, and the remainder is applied toward repayment of the principal balance.

Because your loan balance is declining each month, the amount of interest you are charged also declines each month. And as the interest charge decreases, the principal amount of your payment increases.

The minimum monthly payment is set to “amortize” (literally, pay back) the loan in the exact number of years you selected when your loan was originated. So if you chose a 30-year, fixed-rate loan, your monthly payment was calculated to pay off the loan in exactly 360 installments.

You may have been given an “amortization chart” when your loan began showing the monthly split of principal and interest as well as the declining principal balance.

It’s that declining balance that owners find it fun to review on an annual basis. It literally shows the loan balance dropping month after month. Under most simple interest loans, the early payments are largely interest. In the latter years, most of your payment typically goes to principal payoff.

If you don’t already have one, it’s easy to create your amortization schedule.

Visit bankrate.com and click on “calculators” then “mortgages.” One of their many options allows you to create a complete loan repayment schedule online. If you prefer a free program you can load on your computer, visit money99.com and click on “resources,” then “documents,” and finally “downloads.” At the end of the list, select Mortgage Wizard. I have used this program successfully for years.

Don’t be surprised if your own calculations differ by a few pennies from your “statement of interest paid” from your lender. There are several approaches to rounding used by lenders and they can affect your balance. If you are off by more than few dollars, call your lender and ask for an explanation.

For more information on mortgage loan amortization, visit my Web site: money99.com.

John Adams is an author, broadcaster and investor. He answers real estate questions on radio station WGKA (920am) every Saturday at noon. For more real estate information or to make a comment, visit www.money99.com.