Calculate your own fixed interest mortgage

Calculate your own mortgage and home loan. You might think that calculating your own mortgage is a complicated procedure that only a trained expert can ever dream of achieving. Not the case. Calculating your own home loan or mortgage can be relatively simple if only you put your mind to it and understand the concepts behind the process.

As you already know a mortgage is simply a loan where your own house (or some other valuable good) is placed as security. To make the whole operation worthwhile to the bank, financial instution or lending company that provides the loan, an interest is charged. This interest can be either fixed or variable. If it is a fixed interest, the interest will not change through out the whole tenure (or length) of the loan. These are much easier to calculate. Let’s start with this scenario to calculate our own mortgage.

Calculating your own fixed interest mortgage

There is a simple formula to work out the final, real cost of your home loan or mortgage. Doing this simple but useful exercise will probably shock you to the actual price you are paying for your home. A=P(1+i)^n

Looks complicated doesn’t it . That’s what banks, financial instutions and lending companies probably want you to believe. In fact its simple arithmetic. “A” is the total cost of your mortgage after plugging in the interest you are paying. “P” is the price tag on your home before interest. “i” is the interest rate, in this example it is fixed, which makes it so easy to calculate. “n” is the number of years you will be paying the mortgage for. The strange arrow before the “n” is code for the power of …. which means multiplying something by itself a certain number of times, in this case determined by n. For example 2^3 would mean 2 x 2 x 2 = 8.

Let’s put some real data into this equation. Let’s say that your dream home costs 200,000$, the fixed interest rate is 10% which here we reflect as 0.1 (1 in then is the same as saying 10% which equals 0.1). The tenure of this mortgage, keeping things simple will be of 10 years. Our ugly equation would now look like this.

A (real cost) =200,000  (1+ 0.1)^10  We now get a good calculator or our windows accesories calculator as I’m using now and work it all out. The result is 200,000 x 2.59 which equals 518,748 $!! More than two and a half times the initial cost of your mortgage.

Just working through this simple equation provides some valuable insights into the basic principles of mortgages. Let’s say we bring down the tenure of the mortgage or home loan from 10 years to 5. The real cost of the same home will be 322102. That’s nearly the 200,000$ less than the 10 year mortgage, the initial cost of the house!! Obviously reducing the tenure of the mortgage would increase the monthly payments dramatically, probably to a prohibitive cost. But it does give us an idea of how we can reduce the real cost of our mortgage, by a) reducing our tenure, b) our interest rate.

But what if the interest of your mortgage of your is variable. Then things get a little more complicated, but nothing your most mathematically challenged home buyer can’t deal with. Please see more out our next article, CALCULATE YOUR OWN MORTGAGE VARIABLE INTEREST HOME LOAN.