How are mortgage payments calculated?

A look at how interest-only and fully amortizing loans were born
Published on Oct 8, 2007

The one thing that virtually all borrowers know about their mortgages is the amount of the initial scheduled payment. This is the amount they are obliged to pay each period under the terms of the mortgage contract. They know that failure to pay that amount is a violation of the contract, leading to late charges, delinquency reports and ultimately to foreclosure. While borrowers know the amount, they are often hazy about how it is calculated and what it includes. I will illustrate the possibilities related to a $100,000 loan at 6 percent. In the simplest possible case, the scheduled payment includes only interest until the final payment, when it includes repayment of the balance. The interest payment each month is .06/12, or .005, multiplied by $100,000, which equals $500. The final payment, assuming the borrower paid only interest throughout, would be $100,500. Most mortgages written during the 1920s were of this type, usually with terms of five or 10 years. Their weaknes...