Payment Calculations

No matter what type of loan you are taking out, it is imperative to understand what your payments will be, what they cover, and how the payments are calculated. You should make sure your mortgage company gives you this information and explains it to you fully in advance.

Some loans require you to make payments on both interest and principal. A portion of your monthly payment will go toward each category. Other loans only require you to pay the interest on the borrowed amount. While your monthly payment on these loans may be less, your payment also will not reduce the principal amount of the loan.

Things are slightly different when considering home equity lines. With these loans, the lender is not required to give the exact amount of your monthly payment. However, they are required to let you know how the payment is calculated. This is because home equity lines involve an open line of credit that you can continue to borrow from. As you use your line of credit, your balance will change, and so will your monthly payment.

For example, a company offering a home equity line may tell you that your monthly payment is five percent of your outstanding balance. If you have borrowed $5000, your monthly payment will be $250. If you then choose to borrow more, your monthly payment could increase. For example, if you borrow $5000 more, for a total of $10,000, your monthly payment will increase to $500.

Before going into a loan, it is very important to understand the payment schedule fully. Make sure to ask your lender and clear up any questions you might have about what payments will be, what these payments will go toward, and the method used to determine these payments.