Millennial homeowners: Tips for buying your first home in you twenties.

Do you know how much you’re paying in interest on your mortgage every day, month or year? Interest has always been one of my biggest motivators for getting out of debt because it’s what you pay on top of what you borrowed. Regardless of what debt you have: car note, mortgage, credit card debt or student loans I would bet that a lot of what you’re paying every month goes towards interest.

For example, let’s take a look at my mortgage.

Although my monthly mortgage payment includes principal, interest, property insurance, city tax and PMI (private mortgage insurance), my interest makes up 35% of my monthly payment. With that being said, right now I’m paying $20.37 a day in mortgage interest.

Gosh, that’s expensive!

Reading this out loud and sharing this publicly with you is enough to make my heart beat fast! Although this really sucks, it’s motivating me to pay off my 30-year mortgage fast. Yes, you got that right – my interest is motivating me to take action!

Similar to how I used my daily interest to track my student loan repayment progress, I plan to do the same thing when it comes to tackling my mortgage.

Even though you can certainly use a mortgage calculator to figure out how much you’re paying in interest, here are 3 easy ways to calculate mortgage interest.

How to Calculate Mortgage Interest

A Step-by-Step Guide

Step 1: Figure out your numbers. 

Find your most recent mortgage statement (either paper or online) and write down these numbers.

  1. Current principal balance
  2. Interest rate

Since mortgage interest is based on your outstanding principal balance and interest rate, every month a portion of your payment goes towards paying back the principal and any accrued interest.

Remember, your current principal balance is the remaining balance of what you borrowed, while the interest rate is what your lender charges for lending you money.

Once you’ve gotten your loan balance down to zero, the mortgage company releases the deed of the house and you’re the rightful owner!

Join the 5-Day REVIVE Your Budget Challenge

Step 2: Calculate Annual Interest Amount

Let’s say you took out a mortgage for $150,000 at a 4.25% interest rate for 30 years. How do you figure out how much you’ll pay in interest per year?

First, you’re going to convert the annual interest rate percentage into a decimal interest rate. To do this divide the interest rate percentage by 100.

4.25% / 100 = 0.0425

In this example, 4.25% converts to 0.0425.

Now you’re ready to calculate the annual mortgage interest amount.

Current Principal Balance x Mortgage Interest Rate = Annual Mortgage Interest Amount

This formula calculates the total interest on your mortgage per year.

Based on the example above:

  • Current Principal Balance: $150,000
  • Interest Rate: 4.25% or 0.0425

$150,000 x 0.0425 = $6,375 per year

In this example, you’ll pay $6,375 in interest for the year. 

How about if your interest is 5% and you have a $350,000 loan. How much will your annual interest be then? If you calculated $17,500 a year that’s correct!

  • Current Principal Balance: $350,000
  • Interest Rate: 5% or 0.05

$350,000 x 0.05 = $17,500 per year

Helpful Tip: Remember since the interest you pay is directly tied to the current balance, every month after making a payment, your principal goes down. That means that you’ll pay slightly less interest and more principal with each payment.

Step 3: Calculate Monthly Interest Amount

Current Annual Mortgage Interest Amount / 12 Months = Monthly Mortgage Interest Amount

This formula calculates the total interest on your mortgage per month.

From the previous example we have an annual interest amount of $6,375.

$6,375 / 12 months = $531.25 per month

Here you would pay $531.25 in interest per month. 

Step 4: Calculate Daily Interest Amount

Monthly Mortgage Interest Amount / 30 Days = Daily Mortgage Interest Amount

This formula calculates the total daily interest on your mortgage.

From the previous example we have a monthly interest amount of $531.25.

$531.25 / 30 days = $17.70

In this example, you are paying $17.70 in interest per day on your mortgage. 


Next Steps?

If you’re wondering how you can strategically use your mortgage interest to help you pay off your mortgage quickly, consider using it as a metric to track your progress. Overtime you’ll see your daily, monthly and annual rate decrease which means that you’re getting closer to achieving your goal. #debtfree


In Summary: 

To calculate the annual interest on your mortgage: Current Principal Balance x Interest Rate

To calculate the monthly interest on your mortgage: Annual Mortgage Interest Amount / 12 Months

To calculate the daily interest on your mortgage: Monthly Mortgage Interest Amount / 30 Days

I hope you found this blog post helpful and walk away feeling more informed and motivated to take action.

Cheers to your mortgage repayment success!

READ MORE

Tips for the First-time Home Buyer

2 replies
  1. Greenbacks Magnet says:

    Generally, I notice that people tend to pay twice the amount that the home was purchased for thanks to interest. If you can get that albatross of a mortgage off your back sooner, then the better off you will be.

    Miriam

    Reply

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published. Required fields are marked *