How to calculate your Mortgage Payment
Identify your principal amount (P): This is the amount you are borrowing from the bank, which is the price of the house minus your down payment.
Identify your annual interest rate ®: This is the yearly interest rate on your loan provided by your lender. You need to convert this annual rate into a monthly rate by dividing it by 12.
Identify the number of payments (n): This is the total number of payments you will make to pay off the loan. If you have a 30-year loan and you make one payment per month, then the number of payments is 30 years * 12 months/year = 360 payments.
Plug these values into the mortgage payment formula:
M=P×(1+r)n−1r(1+r)n
where:
- M is your monthly payment.
- P is your loan amount (the principal).
- r is your monthly interest rate.
- n is your number of payments.
Calculate your monthly payment (M): Use the formula to calculate your monthly payment. This will tell you how much you will have to pay each month for your mortgage.
Ex: Suppose you want to buy a house that costs $200,000. You have saved $40,000 for the down payment. So, you need to borrow $160,000 from the bank. This $160,000 is your principal amount (P).
The bank offers you an annual interest rate of 5%. To convert this into a monthly rate, you divide it by 12, which gives you approximately 0.004167 ®.
You decide to pay off the loan over 30 years. Since you make one payment per month, the total number of payments is 30 years * 12 months/year = 360 payments (n).
Now, plug these values into the mortgage payment formula:
M=P×(1+r)n−1r(1+r)n
Substituting the values:
M=160000×(1+0.004167)360−10.004167(1+0.004167)360
After calculating, you find that M is approximately $859.35.
So, your monthly mortgage payment would be around $859.35. This is the amount you would need to pay the bank each month for 30 years to pay off your loan.
Remember, this is a simplified example and actual mortgage calculations can be more complex due to varying interest rates and other factors. Also, this doesn’t include other costs like property taxes and insurance, so your actual payment could be higher. It’s always a good idea to consult with a financial advisor or use an online mortgage calculator for accurate calculations.
Mortgage Payment Formula
the formula to calculate your monthly mortgage payment is given by:
M=P×(1+r)n−1r(1+r)n
where:
- M is your monthly payment.
- P is your loan amount (the principal).
- r is your monthly interest rate, which is your annual interest rate divided by 12.
- n is your number of payments (the number of months you will be paying the loan)
This formula helps you find out how much you will have to pay each month for your mortgage. Remember, this formula doesn’t include other costs like property taxes and insurance, so your actual payment could be higher.
Mortgage Calculation Terms
Home Value: Home Value is the price that you pay when you buy a house. This is the amount that the seller of the house agrees to sell it for and you agree to buy it for. This price is very important because it helps the bank decide how much money they can lend you to buy the house. It also helps you understand how much money you need to save for the down payment. So, in simple terms, the home value is the purchase price of the property.
Down Payment: A Down Payment is like the initial money you give when you buy a house/property. It’s not the total amount, but just a part of it.
For example, if you want to buy a house that costs $100,000 and you have saved $20,000, you can use this as your down payment. The rest of the money ($80,000) could be borrowed from the bank as a loan.
So, in simple terms, a down payment is the part of the house price that you pay in cash upfront.
Down payment in Percentage:
When you buy a house, you usually need to pay a part of the cost upfront, which is called a Down Payment. This is often expressed as a percentage of the total cost of the house. For example, if a house costs $100,000 and you pay $20,000 upfront, your down payment is 20%.
Now, if your down payment is less than 20% of the total cost of the house, you usually have to pay something called Private Mortgage Insurance (PMI). This is a type of insurance that protects the bank in case you can’t pay back the loan.
So, in simple terms, if your down payment is less than 20% of the house’s cost, you’ll likely have to pay extra for PMI.
Loan Amount: The Loan Amount is the money that the bank lends you to buy a house. For example, if you want to buy a house that costs $100,000 and you have $20,000 saved up, you might ask the bank for a loan of $80,000 to cover the rest. This $80,000 is your loan amount. So, in simple terms, the loan amount is the money you borrow from the bank to buy a house.
Interest Rate: The Interest Rate is like a rent that you pay for using the bank’s money. It’s usually a yearly rate. For example, if you borrow $100 from the bank and the interest rate is 2% per year, you’ll have to pay the bank $2 at the end of the year. So, in simple terms, the interest rate is the extra money you pay each year for borrowing money from the bank.
Loan Term: The Loan Term is like the time you get to pay back the money you borrowed from the bank to buy a house. It’s not always the same as the time it takes to pay back all the money (the principal). For example, if you borrow $100,000 for 30 years, that’s your loan term. But you might pay it all back in 25 years if you make extra payments or pay more each month. So, in simple terms, the loan term is the time you have to pay back your home loan, but you might pay it off sooner.
Interest Calculation method:
Interest Calculation Method refers to how frequently the bank applies the interest rate to the principal balance of your loan. In simpler terms, it’s the schedule that the bank follows to determine how much interest you owe at certain intervals during the loan term. Here’s a breakdown:
- Principal Balance: The amount of money you originally borrowed.
- Interest Rate: The percentage the bank charges for lending you the money.
- Calculation Frequency: How often the bank calculates the interest you must pay. It could be monthly, quarterly, or annually, for example.
The more frequently the interest is calculated, the more interest you will end up paying over time due to the compounding effect. Conversely, less frequent calculations mean you’ll pay less interest overall. This method impacts your total interest cost and the speed at which you pay down the loan.
Payment Frequency:
Payment Frequency refers to how often you make payments on your mortgage. Here’s a simple breakdown:
- Monthly Payments: You pay once a month, which is 12 times a year.
- Bi-Weekly Payments: You pay every two weeks, resulting in 26 payments a year.
- Accelerated Bi-Weekly: You pay an amount equal to half your monthly payment every two weeks, leading to 26 payments a year, but you pay off your mortgage faster because you make an extra month’s payment annually.
- Weekly Payments: You pay once a week, which is 52 times a year.
Choosing a higher payment frequency can help you pay off your mortgage quicker and save on interest costs over time. However, the actual impact on your total interest and amortization term is relatively small unless you’re making larger than required payments. The key benefit of accelerated payment options is the faster repayment of the principal, which reduces the interest charged by the lender. Remember, always consult with your lender regarding any changes to your payment schedule to understand the implications fully.
First day:
Payment:
Extra Periodic Payment:
Yearly increase in Payment:
Starting From:
Lump sum Prepayment
Paid on:
PMI
Total Periodic Payment: