Concept

• There is a specific length of time until each dollar of a mortgage is paid back. You pay back some dollars sooner and some later. You actually pay most principal dollars later, as the interest amount decreases based on the declining balance. A 30-year loan, for example, has 360 months numbered from 1 until 360. The month number tells you what number payment you're up to and how many months it takes until that payment is made. The average life is concerned with the time amount of each month's principal payback portion, which is then averaged. There are three ways to figure the average life.
  
  

1st Method

• Multiply the principal dollars paid each month by that month's number and sum the amounts. Divide the total by the loan amount for WAL months. Divide by 12 for WAL years. Say you paid back a $10 loan $2 in the first month (2 * 1 = 2), $3 in the second month (3 * 2 = 6) and $5 in the third month (5 * 3 = 15). 2 + 6 +15 = 23. 23/10 = 2.3. It takes 2.3 months on average to pay back the principal.
  
  

2nd Method

• Multiply each month number by that month's proportion of the loan's principal payback. Each month's waiting time is reduced by its proportion. Add the reduced amounts for WAL months. Divide by 12 for WAL years. For the previous example, the first month pays back 20 percent of the loan, the second month pays back 30 percent and the third month pays back 50 percent. 20 percent of one month (.2) + 30 percent of two months (.6) + 50 percent of three months (1.5) = 2.3 months, same as before.
  
  

Average Life and Interest: 3rd Method

• The average life of a loan works together with the interest amount and interest rate. The loan's average life is as if you paid back all the dollars at that time. Multiply the annual average life by the annual interest rate for the total interest rate. Multiply the total interest rate by the loan amount for the total amount of interest paid on the loan. If, for example, the average life of a loan is 10 years and the annual interest rate is 5 percent, the total interest rate is 10 * 5 percent, or 50 percent. If you borrowed $1,000, for example, your total interest is $500. Conversely, if you know the total amount of interest, divide the total interest amount ($500) by the loan amount ($1,000) for the total interest percentage (50 percent). Divide the total interest percentage (50 percent) by the annual interest rate (5 percent) for WAL years (10).