Formula to Calculate a Mortgage Loan

The first step in calculating a mortgage is determining the monthly payment. From that value, the principal and interest can be calculated on a month-to-month basis. This process is called amortization.

Requirements

To calculate a monthly payment, you need the loan term, the loan value and the loan annual percentage rate (APR). The term must be converted to match the payment period, which is usually months.

Interest Rate

The interest rate must be converted to address a specific pay period. For monthly payments, the APR is divided by 12 since there are 12 months in a year.

Payment Formula

The formula to calculate the monthly payment is: P = L[c(1 + c)^n]/[(1 + c)^n - 1]
P = payment amount
L = loan value
c = period interest rate
n = loan term

Monthly Interest Calculation

Once the monthly payment is calculated, the monthly amortization can be calculated. Multiply the period interest rate by the unpaid balance of the loan. This is the interest for the current month.

Monthly Principal Calculation

When you subtract the monthly interest from the monthly payment, you are left with the principal for the current month. This value is subtracted from the unpaid balance to determine the unpaid balance for the following month's calculations.

Amortization

When all the calculations are completed for the life of the loan, the values are placed in a table called an amortization table. This table represents the entire loan calculation.

Resources

• Various Mortgage Formulas