How is interest on a home loan calculated?

Question

I have just started the process of buying a home and don't understand how interest is calculated.
7.75% of $100,000 is $7,750 which is $300 per month for 30 years.
How come the bank says $650 a month for 30 years which is $234,000?

Answer 1

I didn't understand your numbers at first, but I think I figured out where you went wrong.

Please keep in mind that you pay 7.75% annual interest on the outstanding balance EVERY YEAR. As you pay down the outstanding balance, your interest expense goes down, but you keep paying interest as long as you have an outstanding balance. I think you calculated a TOTAL of $7,750 in interest when in fact this is the FIRST YEAR'S interest. There will be twenty-nine more years of interest.

Monthly payments are figured to result in constant payments every month. To figure your payment you will need a financial calculator or else some form of number crunching software like Excel.

Monthly principal and interest payment on a loan of $100,000 at 7.75% fixed for a term of thirty years, assuming simple interest, is $716.41 per month. Please note this does not include real estate taxes, property insurance or other costs such as PMI or homeowner assessments (if any).

Interest only payments are $100,000 x .0775 / 12 = $645.83 per month.

All of this assumes a 360 day year (all twelve months have thirty days), which is most common.

Hope this helps.

Answer 2

Simple interest is calculated on unpaid principal when each payment is made. The payment amount is first applied to any interest due (plus late charges if any), and the remaining amount is then applied to reduce the loan principal balance.

Interest Rate (APR) 365 Days X Number of Calendar Days Since Date of Last Payment

Answer 3

They are calculating the interest on the house, which is alot! You are basically buying them a home also. It looks like them adding the interest to the cost of your house, just doubled and you are paying for 2 homes. You should try a different bank or tell them "Fu*k You" and move on. Before they try and really get you in da butt! LOL.... Cause they are trying to.

Answer 4

Use a mortgage calculator to determine your payment. From there add to it your estimated monthly property taxes and home owner's insurance.

mortgage calculator, http://www.choicefinance.net/calculators/java_cl.htm

Answer 5

I thought the interest rates are specified at the time u take the loan!!!