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"Can you run payments for me?"

It's among the most common questions I hear as a loan officer.  A buyer does a search for homes in Cincinnati -- maybe Blue Ash, Mason, or Symmes Township or somewhere -- and then wants to know what the monthly mortgage payments of a given house will be.

It's a question I really like to answer, actually, because "mortgage calculator" has 158 millions entries on Google. There's lot of places to get the information, and my clients choose to call me.  I like that.   It's what I'm here for, after all -- to make things as simple as possible.

Working numbers is just one way I do it.

Then, when the math is done, I like to send along 4 basic mortgage formulas for use in Microsoft Excel,  Numbers for Macintosh, or Google Docs.  The formulas come in handy when I'm not immediately available to run payments.

1. How to calculate the monthly mortgage payment on a Principal + Interest loan
2. How to calculate the monthly mortgage payment on an Interest Only loan
3. How to calculate the principal paid to the mortgage in a given month
4. How to calculate the principal paid to the mortgage in a given year

The four screenshots below show these formulas in action. The part that begins with is what goes into the  formula bar. You are welcome to copy these for your own use.

How To Calculate Principal + Interest Payments

A principal + interest mortgage is the most common type of home loan.  Some people refer to it as a "regular" mortgage which implies that anything else is an "irregular" mortgage.

That implication is false.

A more accurate description of a principal + interest mortgage would be to call it a "bank-amortizing home loan" because the bank sets the payment schedule.

Most conforming and FHA mortgages use the principal + interest formula.  This includes, but is not limited to, the 30-year fixed mortgage, the 15-year fixed rate mortgage, the fixed rate Home Equity Loan and nearly all adjustable rate mortgages.

How To Calculate Interest Only Payments

Interest only home loans are the "other" mortgage repayment choice.  They're a lot less common than they used to be, offered now, almost exclusively, via portfolio lenders.

With interest only loans, the bank doesn't tell the homeowner how much principal to pay each month. Instead, homeowners pay as much (or as little) principal as they want until the loan comes due. Versus fixed-rate loans, interest only loans are best characterized as "self-amortizing".

Interest only home loans can be a terrific financial planning when managed properly.

How To Calculate Monthly Principal Paid In A Given Month

The principal portion of a principal + interest mortgage payment increases as the mortgage moves towards maturity.

In the beginning years, the payment is mostly interest.  It's why -- after 5 years -- it can feel like you've hardly dented your mortgage balance.

It's the nasty residue of a bank-amortizing loan. Not until sometime in Year 18 does the principal in an amortizing loan payment outweigh the interest.

How To Calculate Monthly Principal Paid In A Given Year

If you're planning to stay in your home for x years and want to know how much principal you'll have paid over that time, this formula comes in handy.

Note: This formula cannot be used to find home equity levels at some point in the future. This is because home equity is based on your home's value and not its mortgaged amount.

There are hundreds more mortgage formulas similar to the ones above. If you have specific questions about your mortgage, its payments, and the math behind it, call or .

An earlier article explained that downpayments on a home do not earn a return.

After closing on the sale, however, the dynamics can change.

Some mortgage products include a feature called recasting, or recalculating your monthly payment based on the remaining term of the loan.

Recasting loans types include Interest Only loans (during their interest only periods) and Option ARM or other Pick-a-Payment-type loans. A recasting loan affords a borrower the chance to pay down principal and see an immediate ROI.

Because the majority of outstanding mortgage are of the non-recasting type, let's first look at how these mortgages are amortized.

Our example will use a $240,000 30-year fixed mortgage at 5.00%.

In the first month, the borrower's payment is $1,288.37 -- $1,000 in interest payments and $288.37 in principal. For the life of the loan , the payment of $1,288.37 remains constant but the proportion of interest paid vs. principal paid decreases. So, in Month 12, the interest payment is $986.50 and the principal payment is $301.87.

After Year 1, the total amount of interest paid is $11,919.58; the total principal paid is $3,450.86. The monthly payment is still $1,288.37.

Some borrowers prefer to pay extra principal "to pay off their homes faster". If the borrower decides to add an extra $300.00 to his mortgage payment each month, the additional money would be applied towards the principal balance and the home would now be paid in full in 20 years instead of the original 30-year term.

The monthly mortgage payment for the non-recasting loan remains constant at $1,288.37.

This is a terrific option for borrowers planning to own their homes free-and-clear. The example above saved $84,444.85 in interest payments over the life of the loan and the borrower shaved 10 years from his original loan term.

For recasting loans, though, the scenario is different because loan retains its original term. In short, because a recasting loan is always re-amortized to last 10, 15, 20, 25 or 30 years, additional principal investments will result in an lower monthly payment in the months following.

Recasting loans are for people who value positive cash flow.

Which is better for you? As always, it depends. A good rule of thumb, though -- if you are cash flow sensitive and staying in your home for less than 10 years, recasting loans allow you to see an immediate return on principal investment.

Let's tweak the above example slightly.

Because some (but not all) lenders charge higher rates for Interest Only loans, let's adjust the interest rate on the above example to 5.125%. In Month 1, the mortgage payment is $1,025 -- $25 more than the P&I (Principal & Interest) payment on the non-recasting loan.

To compare apples-to-apples, let's assume that the borrower sent $1,288.37 to his lender plus $300 extra. This means that $263.37 will be applied to the principal balance of the loan, reducing it to $239,736.63.

Here is where the scenario gets interesting. In Month 2, the Interest Only mortgage payment is recalculated against the existing balance. The new payment is $1,022.59, or $2.41 less than the month prior. Increased cash flow is the result of additional principal investment.

More aggressively, the borrower may choose to invest larger sums in the property, say an annual bonus of $20,000 or other monies. An additional $20,000 investment reduces the monthly Interest Only mortgage payment by $83.33. The ROI is 5.00% (the same as the mortgage).

Rather than reduce the term of the mortgage by 4.5 years, the borrower increased his monthly cash flow by $83.33. There are not many other investments that can promise a 5.00% return. And, for the borrower planning to refinance or move, the near-term cash flow should be more valuable with respect to a complete financial portfolio.

For non-recasting loans, principal investment yields zero ROI until the home is sold. At that point in time, hindsight may show that the investment was wise. Or, it may show the opposite. it may show that remaining liquid and having greater control over monthly obligations was the safer decision.

The point is, you have a choice -- leave your ROI in doubt and hope for a winner, or earn a real ROI today at a known price.

The safest choice is to seek the help of a mortgage professional to help you weigh your options.

Equity investments in Real Estate earn a 0% return on investment (ROI).

Surprised? Well, let's understand the math (assuming 5% annual appreciation):

A home purchased for $400,000 will appreciate to $420,000 in one year. If the homeowner originally invested $80,000, or 20%, the ROI is 25%. This is true because the initial $80,000 downpayment yielded $20,000 in equity appreciation.

If the homeowner had not invested the $80,000, the home would still be worth $420,000 in one year. In this instance, the ROI is infinite. However, we must take into account that the rate of borrowing will be higher in this example.

With a 7.00% HELOC drawn on the $80,000, the payment will be $5,600 in Year 1. The second example yields a return of at least 357% because the $5,600 additional payment yielded $20,000 in returns.

There are other ROI considerations for the homeowner. A home is an non-liquid asset meaning that once the homebuyer's money is invested in the home, there is a real cost to extracting the money as cash.

The initial $80,000 investment, therefore, is "lost" -- tied up in equity until the homebuyer sells, refinances, or opens a Home Equity Line of Credit.

Not only is the initial $80,000 investment earning 0% return for the homebuyer, it is unavailable for other investments which could be earning 2% as a Money Market Mutual Fund, 5% as a Certificate of Deposit, or even higher returns with other instruments.

Therefore, the opportunity cost of making a downpayment is further depleting ROI for homebuyers.

A "conservative" person will read this argument and say, "That's too risky. I am too conservative to make small downpayment."

I can buy that argument, but those two sentences are not related at all.

A true "conservative" person will recognize that the smaller the amount of downpayment, the larger the risk that the bank is taking. As the homebuyer's downpayment shrinks, so does his personal exposure.

"What if the property depreciates! Then I'll be exposed!" they'll say next.

That's true, but if the property depreciates, there is no advantage to your initial equity investment anyway, right. I'm sorry, but Out of sight, Out of mind is no way to manage your equity investments and finances.

The reality is the conservative financing option is to make smaller downpayments.  In doing so, you push risk to a third party -- the bank! -- and you remain completely as liquid as possible.

Liquidity is the true goal of a conservative investor.

I am not arguing against making downpayments on properties, for the record. But, for people who claim that Real Estate is an investment, they should treat it as such. This is consistent with my philosophy that a mortgage should be one component of a larger (managed) financial plan.

The advantages to making an equity investment in property is that the resultant monthly mortgage payment is lower. If monthly cash flow is low, but investment capital is high, there is an argument for putting 20% or even more into the property. There is also tremendous psychological inertia to overcome with respect to putting less than 20% into a property. Some people just won't hear it any other way.

That's fine -- diff'rent strokes for diff'rent folks!

Okay, with all of this said, there is one way to earn a return on investment with equity investment -- selecting a loan program that recasts monthly.

Think about the traditional fixed loan program -- a $100,000 30-year fixed mortgage will cost $665.30 each month at 7.00%.

If the homeowner wants to invest an additional $300 towards principal each month, the loan's principal will be repaid in 20.5 years.

The mortgage payment remains constant until the loan is paid in full.

For loans that recast monthly -- most notably, Interest Only loans -- the mortgage payment is calculated each month by dividing the interest rate by 12 months, and multiplying the quotient by the remaining loan balance.

Therefore, the same additional principal investment schedule will lower the homeowner's monthly obligation month over month. The 1st payment of $583.33 becomes $576.33 at the end of Year 1.

The ROI for additional principal payments on recasting loans is equal to the interest rate on the loan, or 7.00% in this case.

Sounds like a conservative investment to me.