What's wrong with my simple interest calculation for my mortgage?

Question

I have a home loan that I've made 8 payments on so far. The initial loan amount was for $139,650 at a simple interest rate of 8.5%. The interest accrues on a yearly basis. The bank calculated my monthly payment to be $1,130 / month. Alright, so I'm getting ready to sell the house and I call up the bank to ask how much I still owe on the house. They tell me $139,400. That's only $250 that I've paid off after paying 8 payments of $1,130 (which is $9,040)! I've done this calculation: I = PRT, which gives I = $139,650 * 0.085 * 1 = $11,870.25 of interest this year. $11,870.25 / 12 = $989.19 of interest per month. This should mean I'm paying $1,130 - $989.19 = $140.81 of principle per month, which is about $1,125 over the course of 8 payments! So why have I only paid $250 towards the principle? What am I missing here?

Answer 1

Your payoff will always be higher than what your balance shows. This is because your lender is owed their interest up until the exact day that your loan is paid in full.

Also, the principal amount that goes to your loan every month is not correct, since interest is "front-end" loaded, meaning that the majority of your payment is interest for the first half of the loan, until it reverses and you start to pay more towards the principal than interest. If you've only made 8 payments thus far, your principal owed has barely been touched.

Hope this helps!

Answer 2

I read the other answers and I think simplicity may help. A mortgage that is amortized over a period of time while keeping the payment constant requires a greater portion of the payment be applied to interest in the early years of the loan. As the loan nears maturity, a greater portion of the monthly payment will be applied to the outstanding principal.

Answer 3

Silly....they (the lender) will keep adding interest on top of interest on the remaining balance each and every month that the loan balance is not paid off! So each month you are paying off a new balance from the last month....review your Truth in Lending statement that is given to you (by law from lender) or email me so I can run an "amortization schedule" of payments for you....you CANNOT utilize a regular calculator for payments unless you have the "interest payment factor" formulas to use. email me at: [e-mail]

Answer 4

Amortization, you pay all the interest of the loan in the beginning of the loan, so yes its simple interest but its how the interest is amortized in the detailed payment break down also ask for an amortization schedule, also interest accrues daily.

Answer 5

their figures are right, you may not be considering impound taxes, impound ins on monthly basis.
additionally, figure your cancellation costs for prepay on an initial rate first quoted and see if any or all of these have been removed in addition to the interest and not come up with a new figure.
also go to the branch and get a printout of your account monthly, you can do that, and on that statement that you would normally get annually, will show all the disbursements and debits that were charged to your acct.
Don't for get late charges, if you paid and it didn't get there on time and you were chg-ed for being late and you forgot!

Answer 6

Ask the bank for a detailed breakdown/statement of your payments and how they were applied: interest, principle, escrow, etc.

Answer 7

enter critical: _____________ Multiply (pastime * critical) / 12. it fairly is the month-to-month pastime enter month-to-month cost different than escrow Subtract month-to-month pastime from month-to-month cost the adaptation between the month-to-month cost and the month-to-month pastime is the critical help. Subtract the critical help from the commencing up critical. This turns into the commencing up critical for month 2. Repeat this technique for each month until the internal maximum loan is paid off. regrettably i won't be able to connect an Excel spreadsheet to Yahoo.

Answer 8

when they calculate the payoff amount for you they are adding in interest to the anticipated payoff date, so your payoff amount will be higher than your principal balance.