How It Works
Fixed Term Mortgage…a review
There is a transaction between persons where an asset, such as a house, is given as guarantee in exchange for funds. An interest rate and a loan term are determined, a periodic payment is calculated and as long as the borrower makes the payment on time, he has use of the asset.
Every fixed term/ fixed rate loan comes with an amortization schedule or table or calendar which describes the movement of monies every time there is a scheduled payment for the life of the loan.
For the purposes of this example, let's say a borrower is about to make a scheduled mortgage payment for the month of July. The following predictable sequence of operations occurs on the payment date every month until the end of the loan term and the owed amount (loan balance) is 0.
loan balance from June * annual interest rate/12 = interest due for the past month*
monthly mortgage payment – interest due for the past month = monthly principal for July
loan balance from June – monthly principal for July = loan balance for July
The monthly principal is the actual amount deducted from the loan balance every month, after the monthly interest has been paid to the lender. Any monies added to the regular payment will be considered principal and deducted directly from the loan balance.
*compounded monthly