When you're applying for a mortgage, it's always interesting to calculate the effect of different rates and fees on your monthly payment and the amount of interest you'll pay on your loan. At one time, the best available way to determine this information was using a hand-held calculator with built-in real estate functions. Specialized and relatively inexpensive calculators with these capabilities are still available, but an easier, faster and completely cost-free way to calculate mortgage interest is with a Pocket Sense online mortgage calculator. One big advantage of all online calculators over physical calculators is that because of their larger screen sizes, they can show more variables simultaneously. This allows you to change one variable at a time to see the effect of each change.

## How to Calculate Mortgage Interest

You can calculate mortgage interest on the Pocket Sense calculator on the righthand side of this page.

With the Pocket Sense mortgage calculator, you determine the monthly payment by plugging in

- Home price
- Down payment
- Mortgage term
- Annual interest rate

For example, if the home price is $362,500, with a 20 percent down payment of $72,500, the amount borrowed is $290,000. With an annual interest rate of 4.25 percent, the Pocket Sense calculator shows monthly payments of $2,181.61 on a 15-year fixed mortgage. Reducing the downpayment to 15 percent ($54,375) on that mortgage increases your monthly payment to $2,317.96. If you retain the lower $54,375 down payment and change the loan period to 30 years, the calculator shows that your monthly payment drops to $1,515.79.

Note that if you do not put in an interest rate, the calculator uses your credit score (which you'll need to specify by credit-score range) to come up with *a probable interest rate.* The actual rate you'll pay depends on a number of factors, including how willing you are to shop for the best available APR (annual percentage rate).

Something else to consider is the total cost of the loan, including principal and interest. You can do this on your smartphone by multiplying the monthly payment, $1,515.79 in the last example above, by 360, the number of payments on a 30-year loan. This totals $545,684.40. **In other words, on this $308,125 loan (the actual amount borrowed after deducting your $54,375 down payment), you're paying $237,559.40 in interest** ($545,684.40 - $308,125.00)**.** Making the same calculation for a 15-year period, increases the monthly payment to $2,317.96 but reduces the total loan cost to $417,232.80 ($2.317.96 x 180), **which means you're paying only $109,107.80 in interest,** **a saving in interest costs of $128,451.60 over the interest costs of the 30- year loan** ($237,559.40-$109,107.80).

## The Cost Advantage of Shorter Loan Periods (With a Couple of Alternatives)

In the previous section, the total interest cost of a 30-year loan when compared with the interest cost of a 15-year loan showed a dramatic cost difference. But as housing costs have risen markedly from 2010 through 2018, borrowers are often stretching their budgets to make even a 30-year mortgage possible; a 15-year just isn't doable. What then?

There are a couple of things you can do that will lower your interest costs on a 30-year loan and are relatively achievable. The first thing to consider is simply to change your payment schedule from once monthly to bi-weekly (once every two weeks). In years past, getting lenders to make this change was difficult; some lenders would simply refuse to do it. As the cost savings have become more widely known, however, more borrowers have come to want this option and in response, most lenders now have twice-weekly amortization schedules set up and ready for use. *But you do need to ask them to do it.*

The savings are larger than you might think. For example, on the $308,125, 30-year loan (net of the downpayment) with its 4.25 percent interest rate and $237,559.40 in total interest payments, switching to a bi-weekly schedule reduces total interest payments to $198,741.72, an interest savings of $38,817.60.

What you're doing when you switch to a bi-weekly loan schedule is adding a 13th payment each year and distributing that extra payment evenly into each of your 26 bi-weekly payments. The extra $58.30 payment every two weeks is probably doable and the effect is dramatic. Not only do you save $38,817.60, you'll also pay off the loan in 308 months instead of 360 – over four years early!

Another good way to knock down interest costs is to add whatever you can afford to the scheduled monthly payment. This is particularly effective early on in the loan because once you've reduced the principal amount owed by an added payment in a given month, from then on you're being charged lower interest amounts every month. Since a greater part of your payment goes toward principal reduction, your loan pays off faster.

Using the same loan example as above ($308,125 30-year loan at 4.25 percent), if you were able to make an extra payment of just $1,000 in the first year of the loan, you'll reduce your total interest costs by another $771.00. A single added payment of $5,000 in the first year of the loan reduces total interest costs by nearly $4,000. If you maintain your scheduled principal payments after making a lump sum addition, you'll also pay off your loan months earlier than the 30-year scheduled payoff.

## A Cautionary Note on Refi's

One thing to look out for after you've had your mortgage loan for a while is an appealing offer to lower your monthly payments with a refi – a new loan that pays off your current loan. If your credit score is relatively good, these offers will land in your mailbox at least once a month.

The offers sound appealing (otherwise, who would bother making them?) but the reality may be somewhat less so.

For instance, in the example above (a $308,125 30-year loan at 4.25 percent), you may have seven years left on the loan. As scheduled, you're making monthly payments of $1,515.79. You're now offered a 15-year refi at the same nominal interest rate and with a new payment of only $804.94 – which reduces your monthly payment by $710.85.

This new loan payment may sound great, but if you're 23 years into a 30-year loan and they're offering you a new 15-year loan, they're asking you to compare apples and oranges (without telling you there's more than one fruit involved). Of course, *the new payment will be lower, but that's because the new 15-year loan term is longer than the seven years remaining on your current loan. And the added costs will be significant.*

If you're into your original loan 23 years, you'll have a balance remaining of about $107,000. If you continued with your original loan as scheduled, you'd have 84 payments of $1,515.79 remaining to pay it off, which totals $127,326.36 The new loan requires 180 payments of $804.94, which totals $144,889.20. You're paying an additional $17,562.84 in interest costs.

And that's the best case. In practice, many refi offers give you a nominal rate offer of, for example, 4.25 percent. But that's not necessarily the APR rate – the real interest rate you'll be paying. Once closing costs and various loan fees are added in (and they'll be added to the principal amount you'll need to pay off), your APR rate can be as much as an additional interest point higher. In that case, the new loan in the example can cost as much as an additional $30,000 in interest costs.

In general, it's not a great idea to refi *unless you're getting a significantly lower interest rate and the closing costs are reasonable.*

#### Tips

If you're a current or former member of the armed forces, remember that you're entitled to a VA loan, which carries a slightly lower interest rate than the generally available rate.

References

- Zillow: Amortization Calculator
- Zillow: Mortgage Calculator
- Bankrate: The Difference Between Interest Rate and Annual Percentage Rate, or APR
- Consumer Financial Protection Bureau: What is the difference between a mortgage interest rate and an APR?
- Consumer Financial Protection Bureau. "What Is an 'Interest-Only' Loan?" Accessed July 1, 2020.
- Consumer Financial Protection Bureau. "What Is Amortization and How Could It Affect My Auto Loan?" Accessed July 1, 2020.
- California State Board of Equalization. "Lesson 7: Periodic Repayment (Assessors’ Handbook 505, Column 6)." Accessed July 1, 2020.
- MIT OpenCourseWare. "Chapter 17: Mortage Basics II: Payments, Yields, and Values." Accessed July 1, 2020.
- Bank of America. "Example of Credit Card Agreement for Bank of America Visa Signature Accounts," Page 8. Accessed July 1, 2020.
- Board of Governors of the Federal Reserve. "Regulation Z Truth in Lending: Introduction," Page 12-19. Accessed July 1, 2020.
- Consumer Financial Protection Bureau. "Learn About Loan Costs." Accessed July 1, 2020.
- Consumer Financial Protection Bureau. "CFPB Report Finds Sharp Increase In Riskier Longer-Term Auto Loans." Accessed July 1, 2020.
- Consumer Financial Protection Bureau. "Can I Prepay My Loan at Any Time Without Penalty?" Accessed July 1, 2020.

Writer Bio

I am a retired Registered Investment Advisor with 12 years experience as head of an investment management firm. I also have a Ph.D. in English and have written more than 4,000 articles for regional and national publications.