Learning how to calculate monthly mortgage payments will allow you to better assess your financial picture. It also helps you make the right choice on what type of mortgage you want to pursue. Your mortgage payment will likely be your largest debt; therefore, it is wise to know how much you can afford before you start looking for a home. If you know how to calculate your mortgage payment, you will know how much of your payment goes to pay the principal balance and how much goes to pay the interest.
Learn the formula by understanding the definition of each variable. A mortgage formula for monthly payment (F) consists of the principal (P), also known as, a capital loan amount, interest rate (I) from 1 to 100 and loan coverage or length of time for repayment of mortgage (L). Complete the formula by plotting monthly interest (M) with the period of repayment (N). Payment frequency (PF) is the number of repayments on a given year. In this case, itβs 12 payment frequencies over a spread of one (1) year.
Calculate the monthly interest rate (M) using the formula i = (1 + I/PF)^(12/PF) β 1. Note that the symbol ^ stands for the power of. Start your computation by plugging in your numbers. Assuming the principal loan amount is $250,000 at 7 percent interest with payments spread over a period of 30 years, calculating the monthly interest I = (1+0.7/12)^(12/12)-1 yields 0.0058333333.
Calculate the period of repayment (N) by multiplying the payment frequency to the terms of the mortgage. The repayment period (N) is 360 or 12 monthly payments multiplied by 30 years.
Calculate the annuity factor (or the mathematical figure that shows the present value of an income stream that generates one dollar of income each period for a specified number of periods) using the formula-- Annuity factor = {1 β [1/(1+i)]^n}/i. Annuity factor is = {1 β (1/(1+i))^360}/.00583333333 or 150.3075.
Derive the monthly payment (F) by multiplying the principal loan amount with the annuity factor or divide by 150.3075. The answer is a monthly mortgage payment of approximately $1,663.26.
Tip
- Use an online mortgage calculator, such as the one you'll find at mortgagecalculator.org to simplify the process by plugging in the numbers.
References
Resources
- Mortgage Calculator: Free Online Mortgage Calculator
- Bank Rate: 15-year vs. 30-year mortgage calculator
- Making Home Affordable: Understanding Mortgage Statements
- State of Nevada: Understanding the Terms of Your Loan Before You Sign
- Financial Web: 3 Helpful Metaphors to Better Understand Mortgage Payments
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