If you're applying for a mortgage loan with a fixed rate, you're probably wondering how lenders or real estate brokers come up with the amounts in calculating your monthly payments. Knowing how to calculate fixed mortgage rates helps you plan your finances. Lender and real estate sites provide free online mortgage calculators, but using mathematical formulas to calculate a fixed mortgage rate manually will give you a better understanding of how the computation works.
Calculating Monthly Mortgage Rate
Find out the annual interest rate before determining your monthly fixed mortgage rate. Your lender should provide you with the value of the annual interest rate.
Use the formula i = annual interest rate/100/12. Divide the annual interest rate by 100, then divide the result by 12 to get the monthly fixed rate. For example, if you have a loan of $150,000 bearing a 5.85 annual interest rate and scheduled for repayment over a span of 15 years, you’ll have a fixed monthly mortgage rate of 0.004875.
Calculating Monthly Mortgage Payments
Using the same example, calculate the monthly mortgage payment by using the formula M = P (i(1+i)^n)/(1+i)^n), where “M” stands for mortgage payment, “P” stands for principal loan amount, “i” stands for monthly fixed rate and “n” stands for the total number of monthly payments (12 months multiplied by 15 years equals 180 monthly payments).
Solve for (1+i)^n = (1.004875)^180, which yields 2.399758. Simplifying the formula M = P(i(2.399758))/(2.399758 – 1) will result in M=P (0.004875 x 2.399758)/1.399758 or M = $150,000 x 0.0083577. Your monthly payment comes up to $1,254.
Factors Affecting Mortgage Rates
Mortgage rates seem like moving targets, affected by various economic forces, from the Federal Reserve announcing percent increases or decreases in interest rates to the fluctuating behavior of the stock and bond markets. Consumer reactions to the various economic forces can also cause mortgage rates to change.
Unlike adjustable rates, fixed mortgage rates never change. Having a long-term fixed rate on your mortgage loan means you’ll have a steady monthly payment over the course of your loan. Any changes to the market interest rates do not affect the amount of your fixed mortgage rate, regardless of what happens to the economy that affects the interest rates. Fixed-rate mortgages will suit you best if you plan to stay in the same home for a long time.
Downsides of Fixed-Rate Mortgages
Usually, fixed mortgage rates are higher than short-term adjustable mortgage rates. In addition, when the market rate goes down, your mortgage rate remains unchanged unless you apply for refinancing. If you plan to live in your home for only a short time, you might be better off with an adjustable-rate mortgage, which will involve lower monthly payments because of lower short-term interest payments.
- Comstock Images/Comstock/Getty Images