SL 1: Review of Mortgage Loan Components
understanding how mortgage work
There are three parts to a mortgage:
the original amount that you borrow with an obligation to repay the amount over a set term.
a percentage amount that you agree to pay the lender for use of the principal amount until the full amount is repaid.
the length of time (generally in months) to repay the principle.
Example: the lender gives a home buyer $100,000 to buy a home. The buyer agrees to pay 6% annually on the loan balance for 30 years (term) until the entire amount has been repaid.
If the buyer pays interest-only payments, s/he will pay the lender $6,000 each year for use of the loan:
(calculated as: $100,000 X 6% = $6,000)
However, the buyer needs to pay back the loan over a period of time (term),
So s/he will pay an additional amount over the required interest payment to reduce the principal amount to zero.
There is a mathematical formula that constructs an amortization schedule that shows what monthly dollar amount the buyer must pay in order to reduce the loan to zero over a certain period of time; i.e., 30 years.
All amortization schedules use a term: the most common term for home mortgages is 30 years (360 months). But other mortgage terms may include 15, 20 and 25 years.
There are even 40- and 50-year mortgage terms in some markets.
Download this spreadsheet to run your own numbers.
Scroll down the spreadsheet to see the accumulated interest paid over the life of your loan.