What is Your Real Mortgage Interest Rate?

What is Your Real Mortgage Rate?

Calculating the real interest rate on your mortgage is actually quite simple. To do so, you will need to know the following.

Principal amount: This is the amount of your mortgage. In the example below, the amount is $300,000.
Interest rate: This is the interest rate the bank is charging you. In the example below, the rate is 5%.
Length of loan: This is the term (number of years) of your loan. In the example below, the term is 30 years fixed.

You can use this easy-to-use amortization schedule to calculate your loan payment –> click here.

Let’s look at the real interest rate in Years 1, 10, 20 and 29 in the following scenario with a monthly mortgage payment of $1,160 for 360 months.

Here is the math for Year 1:

Step 1: Calculate Actual Interest: The first step to calculating the real interest rate is to calculate the actual interest paid based on your mortgage rate (in this example 5%).

$300,000 x 5% = $15,000

Step 2: Determine Monthly Payment: Next, determine the monthly payment. To do so, divide the actual interest calculated in Step 1 by payment frequency (12 months).

$15,000 / 12 months = $1,250

Step 3: Determine Real Interest Rate: The third step to calculate the real interest rate you are paying is to divide the monthly payment calculated in Step 2 by your actual monthly payment (in this example $1,610).

($1,250 / $1,610) x 100 = 77.64%

From the amortization schedule, we see the first month’s payment consists of $1,250 paid in interest with $360 going toward principle. Simply, this means we’re paying $1,250 to borrow $360.

Here’s the math for Year 10:

Step 1: $242,238 (year 10 balance) x 5% = $12,111.96

Step 2: $12,112 / 12 months = $1,009/mo (based on your actual interest rate)

Step 3: ($1,009 / $1,610) x 100 = 62.73%

Here’s the math for Year 20:

Step 1: $148,891 (year 20 balance) x 5% = $17,445

Step 2: $7,445 / 12 months = $260/mo (based on your actual interest rate)

Step 3: ($620 / $1,610) x 100 = 38.53%

Here’s the math for Year 29:

Step 1: $20,338 (year 29 balance) x 5% = $1,017

Step 2: $1,017 / 12 months = $85/mo (based on your actual interest rate)

Step 3: ($85 / $1,610) x 100 = 5.26%

The Real World Scenario

Amortized loans are front-loaded with interest and a great benefit to your Lender, not You.

In reality, most of us don’t hold our mortgages for the full term. In fact, we only hold our loans for a fraction of the loan term, say 5 or 7 years. It’s for this very reason that mortgage payments tend to be mostly interest – we never get to the point where the principal actually surpasses the interest.

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