Final answer:
To determine the amount of interest and principal paid in a monthly mortgage payment, calculate the interest by multiplying the outstanding principal by the monthly interest rate, then subtract this amount from the total payment to find the principal reduction. The new balance is the remaining principal after subtracting the principal payment.
Step-by-step explanation:
To answer the student's question about mortgage payments, we must understand how the monthly payments are calculated and how they are divided into interest and principal components.
Typically, a portion of each monthly payment goes towards the interest owed, while the remainder reduces the principal balance of the loan. Over time, as the principal balance decreases, the interest portion of the payment decreases, allowing more of the payment to go towards reducing the principal.
Interest Calculation
The interest for the current month is calculated by multiplying the outstanding principal balance by the monthly interest rate. For a loan like a mortgage, the monthly interest rate is the annual rate divided by 12.
Principal Reduction
After the interest is deducted, whatever remains from the total monthly payment is used to reduce the principal balance. This means that if the student has a fixed monthly payment, the amount that goes towards the principal will increase every month as the interest portion decreases.
New Balance Calculation
To calculate the new balance after a payment, subtract the principal reduction from the current balance.
For example, if a $300,000 loan has a 6% interest rate that is convertible monthly with monthly payments over 30 years, first calculate the monthly payment using the loan's terms and then allocate how much of that payment is interest versus principal.
The new balance will be the remaining principal amount after the monthly payment has been made.