How to Calculate Mortgage Payments
Do you know what mathematical formulas are used to calculate mortgage payments? The internet has provided us with many great tools, including a wide variety of free mortgage calculators. It is no surprise that many homeowners don’t understand how their monthly mortgage payment is calculated, because you don’t need to anymore.
While using a mortgage calculator can be very helpful and a huge time saver, it may not help tell where your money is exactly going. That is why it is important to understand the formulas used to calculate mortage payments so that you know exactly where each penny is being allocated. Even if you just use the mortgage payments formula one time, it will be worth your effort.
If you want to learn more about how all of your money is allocated, please check out more information below on how to calculate mortgage payments by using a formula instead of a loan calculator.
Calculate Mortgage Payments Using 3 Variables
In order to properly calculate loan payments, there are a few pieces of data that you need before you can get started. While some mortgage details vary, there are a few common attributes that are required to calculate mortgage payments.
- Mortgage Principal – The mortgage principal is simply the total amount of your loan. If you are looking to refinance your mortgage, then this amount would be the remaining principal on your home. An important thing to remember is this value is not the price of your home, but the amount you are financing.
- Annual Interest Rate – What interest rate are you paying on your mortgage? In order to calculate mortgage payments for a traditional fixed loan, you can simply use the annual percentage rate. If you have a variable rate mortgage, then you cannot use the calculate mortgage payment formula defined below. In this case, it may be easier to use one the free mortgage calculators online.
- Length of the Mortgage – This variable refers to the length of your mortgage (usually in months). For example, if you have taken out a 30 year fixed rate mortgage, then your total number of monthly payments will be 360. Take the number of years on your loan and multiply by 12! If you are refinancing, you may need to calculate the remaining full years on your loan and add the rest of the months in the current year to get the total.
Formula Used to Calculate Mortgage Payments
Now that we have covered the minimum fields required to calculate mortgage payments, it is time to review the actual formula to be used. It is important to note that you can calculate your mortgage payment the old fashioned way – by hand, or use a spreadsheet software to run the numbers.
The following mortgage payment formula can be used for most fixed rate loans.
M = P [ i(1 + i)^n ] / [ (1 + i)^n - 1)]
The variables in the mortgage payment formula can be represented as follows -
- M – Monthly Payment
- P – Principal to be paid on the loan
- i – Annual interest rate divided by 12 (number of months per year)
- n – Length of mortgage in months
Calculate Mortgage Payment Example
To make things easier to follow, it helps to see a real example. Here is the breakdown of a 30 year fixed rate mortgage and the monthly payment that can be expected.
- P – $250,000 (Principal)
- i – .00542 (Annual Interest 6.5% (.065) divided by 12)
- n – 360 (total months)
To Begin, we will plug in the variables into the equation and begin calculating the monthly mortgage payment.
- M = $250,000 [.00542(1+.00542)^360] / [(1+.00542)^360 - 1]
- M = $250,000 [.00542(1.00542)^360] / [(1.00542)^360 - 1]
- M = $250,000 [.00542(7.00014)] / [(7.00014) - 1]
- M = $250,000 [.03791] / [6.00014]
- M = $250,000 [.00632]
- M = $1579.53
There you have it. Sure you could have used one of the many available free mortgage calculators, but now you know how to do it manually. We have successfully calculated our new monthly mortgage payment to be – $1,579.53!
Based on rounding, if you went to an online mortgage calculator, you may find your monthly payments a few cents off.
Final Thoughts
The easy thing for many people to do is find a mortgage payment calculator online that will save you time and frustration. Unfortunately, running one of these calculators doesn’t provide you with all of the facts and can be an arbitrary number that you truly don’t understand. Since a mortgage probably takes up a considerable amount of your monthly income, you should do yourself a favor and calculate your mortgage payment by hand.
Remember to always ask any questions you may have about taking out a mortgage to your lender or financial adviser. Now that you know where the numbers come from, you can make important decisions on what kind of mortgage you would like or what kind of refinance plan you may be interested in!