Financing a $1,400,000 house with a 30-year loan at about 6.4% interest means you’ll have to figure out a monthly payment. So, here is the simple breakdown of calculations and results for the budget planning for your mortgage.
Loan details and assumptions
In this case, you make a down payment of 20%, which equals a sum of $280,000. Hence, your loan amount is $1,120,000. The annual interest rate is 6.4% (0.533% per month), and the loan tenure is 30 years, or 360 months.
Monthly payment calculation
To determine the monthly mortgage payment, the following formula is used:
M = P[r(1 + r)^n] / [(1 + r)^n – 1]
Where:
- M is the monthly payment
- P is the loan amount ($1,120,000)
- r is the monthly interest rate (0.533%)
- n is the number of months (360)
Using this formula, the monthly payment comes out to approximately $7,005.67.
Interest vs. Principal breakdown
The initial period of the loan will see most of your $7,005.67 payment being taken up by the interest instead of touching the principal balance. Over time, as you keep making these regular payments, a larger portion of that payment will begin to be applied towards reducing the outstanding amount owed on your loan balance. This process is generally referred to as amortisation.
For example, in the first month:
- Interest portion: The interest for the month is calculated as 0.533% of $1,120,000, which equals $5,965.60.
- Principal portion: The remaining amount from the $7,005.67 payment goes toward the loan principal, which is $1,040.07.
Each month, as the loan balance decreases, the interest portion decreases, and more of your payment goes toward the principal.
Total interest paid over the life of the loan
Over thirty years, you would make as many as 360 payments of $7,005.67 per month, amounting to roughly $2,522,041 in total at the end of the loan term. Since the initial loan amount was $1,120,000, the total interest paid over the life of the loan equals about $1,402,041.
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Key takeaways
- With a 6.4% interest rate and a 30-year loan term, the monthly payment on a $1,120,000 mortgage is $7,005.67.
- The loan starts with higher interest payments, but over time, the principal portion increases.
- By the end of the loan, you’ll pay roughly $1,402,041 in interest in addition to repaying the loan balance.
Understanding how interest and amortisation work can help you manage your mortgage payments effectively. If you plan to pay off the loan early or refinance, you can also reduce the overall interest paid.
