To illustrate the standard procedures observed by the bank, the following information will be used. Generally, this is the same protocol by which all other types of loan payments are applied.
The first step is to compute the basic principal amount and the basic monthly interests due on your loans; this is with the assumption that all interest computations are based on outstanding balances.
Supposing the bank granted you a mortgage loan of $200,000, payable in 30 years at 7% p.a. The simplest way to compute your monthly amortization is to divide the principal by 360 months, which was computed by multiplying 30 years by 12 months since this is the number of months per year.
To Compute for Basic Monthly Amortization of Principal = Principal ⁄ 360 months
Monthly Amortization on Principal = $200,000 / 360 months = $ 555.55
Amount due as monthly payment for mortgage loan principal = $ 555.55 per month
Computation of Interest per Month
Principal x Interest Rate / 12 months= Monthly Interest
= ($200,000 x 7%) / 12 months
= $14,000 / 12mos = $ 1,166.67
Amount due as monthly interest payment = $ 1,166.67 interest per month.
However, interests on long term loans are generally computed based on the outstanding balance. This means that after making your payment on the first month, your principal balance on the second month will be $199,444.45 ($200,000 - $555.55). The latter amount will be the base value for computing the interest due for the second month and the same principle is observed throughout the maturity of the loan. For a more comprehensive illustration on how interest payments for long-term loans are calculated, a related article entitled Creating a Loan Amortization Table Using Excel" features a more vivid depiction. .
To Compute for Basic Monthly Amortization
Amount due as monthly payment for mortgage loan principal + Amount due as monthly interest payment = Monthly Amortization Due
= $ 555.55 + $ 1,166.67
= $1,722.22 Monthly Mortgage Loan Amortization
If you have been paying the amortization amount stated on the billing statement, let’s say for the past ten years, only $66,667 ($ 555.55 x 12 months x 10 years) has been deducted from your principal. The rest was applied as interest payment, hence the minimal effects of the monthly amortization on your principal loan. This is assuming that you have not defaulted on your payments on any occasion during the past ten years.
To countercheck, there is a remaining balance of $133,333 ($ 555.55 x 12 months x 20 years) add to it the paid-up amount of $66,667 and you have a loan amount of $200,000.
Based on this rough and simple computation, you will perceive that the bulk of your monthly loan payments were applied as interest.