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Mortgage-Backed Securities: Products, Structuring, and Analytical Techniques by WILLIAM S. BERLINER, ANAND K. BHATTACHARYA, FRANK J. FABOZZI

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MORTGAGE LOAN MECHANICS

As described above, mortgage loans traditionally are structured as fully amortizing debt instruments, with the principal balance being paid off over the term of the loan. For a fixed rate product, the loan’s payment is constant over the term of the loan, although the payment’s breakdown into principal and interest changes each month. An amortizing fixed rate loan’s monthly payment can be calculated by first computing the mortgage payment factor using the following formula:
002
Note that the interest rate in question is the monthly rate, that is, the annual percentage rate divided by 12. The monthly payment is then computed by multiplying the mortgage payment factor by the loan’s balance (either original or, if the loan is being recast, the current balance).
As an example, consider the following loan:
Loan balance:$100,000
Annual rate:6.0%
Monthly rate:0.50% = 0.005
Loan term:30 Years (360 Months)
The monthly payment factor is calculated as
003
Therefore, the monthly payment on the subject loan is $100,000 × 0.0059955, or $599.55.
An examination of the allocation of principal and interest over time provides insights with respect to the buildup of owner equity. As an example, Exhibit 1.1 shows the total payment and the amount of principal and interest for ...

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