Simply put, this is the outstanding portion of your loan that you still need to pay. Every loan has this balance until you have completely paid off your mortgage in its entirety.
Let’s say you have a $100,000 mortgage with a 4.2% interest rate. To calculate the approximate interest charge, you would multiply the balance by the interest rate:
$100,000 * 4.2% = $4,200 annual interest
Now, to calculate the interest on your monthly mortgage payment, you would divide the annual interest amount by 12 months:
$4,200 / 12 months = $350 monthly interest
If you decided to pay off your loan in full in the first month, you would pay the principal amount of $100,000 plus the amount of interest incurred up to that point, or in this case $350. In other words, you paid off your outstanding loan balance of $100,350.
Lenders actually calculate interest accrued on a daily basis because months have different number of days. Therefore, each day that you don’t pay your loan off, your total balance increases.
For example, our $4,200 annual interest divided by the number of days in a year gives us our interest per day.
$4,200 / 365 days in a year = $11.51 daily interest
If you paid off your balance on the 15th of the first month, you would actually need to pay $100,000 principal + ($11.51 *15) = $100,172.65.
Note: On your mortgage bill, you may see two different numbers: your principal balance and your loan balance or payoff balance. The principal one is the amount left to pay on your loan excluding interest and fees. The loan/ payoff balance, on the other hand, is the principal amount plus all interest due (calculated daily), outstanding fees, and any applicable pre-payment penalties.