Wednesday, September 23, 2009

How to Calculate Interest Payment

I had often confused about the calculation of interest payment, especially for mortgage interest payment. So i sort it out today and share with my fellow comrade =).Nowadays, there are two major type of mortgage loan package in the market. One is floating rate and another is fixed rate. Of course we know that floating rate is based on Base Lending Rate plus Spread and fixed rate will not change. Most mortgage loan payment goes up to 15 - 30 years. By the way, how the mortgage interest payment being calculate?

I will give a very brief example here to illustrate the payment of mortgage loan.

The picture shown loan amount of RM100,000 with interest rate of 5%. Let's say the interest compound annually and the annual instalment is RM12,000. After 10 years you still owe bank RM22,814. Paying another 2 - 3 years then the house totally belong to you.
Your instalment payment should at least more than the interest payment in order to reduce the principal amount for calculating interest.

How to Calculate Monthly Instalment Amount?

Step 1, determine the principal amount, the interest rate.

Example, Principal Amount = RM100,000, Interest = 4%

Step 2, Find the compound interest factor. Using the formula below (inside the bracket one).

1. If the interest is 4%, then the i = 0.04
2. n = total years you need to do instalment.
3. Compute the compound interest.


 = 11.11 <-- Compound factor

Note: If the interest rate is compounded monthly, then you have to take the following step:

i. Divide i by 12, replace i with result.

ii. Multiply n by 12, replace n with result.

iii. Compute the compound factor

Step 3: Use the Principal Amount divide by the compound factor to find yearly payment (Pmt). If want to find monthly payment, take the yearly payment divide by 12.

Yearly payment = RM100,000 / 11.11
Yearly payment = RM9,000.90
Monthly payment = RM9,000.90 / 12 months
Monthly payment = RM750.08

Note: If the interest rate is compounded monthly, then you just have to use the principal amount divide by the compound factor. The answer is in monthly payment. No need to further divide by 12.

The above illustration assume the number of year for payment is fixed. If you want to compute based on fixed instalment payment, you will have to use different variable in the formula. Twist and turn the formula will get you the answer. If you need help, please leave a comment.


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