How to Compute a Fixed-Rate Mortgage

Fixed-rate mortgages are one type of mortgage product offered by lenders. With a fixed-rate mortgage, you lock in the interest rate that you will pay for the life of the mortgage. Your interest rate will not increase if rates rise, nor will interest rates fall if interest rates go down. These loans are advantageous because you can easily budget for your monthly payment because it will not change. To calculate your monthly payment, you need to know how much you borrowed, the term of your loan, and the interest rate.

Difficulty: Moderately Easy

Instructions

Things You'll Need:

• Calculator

1. Determine how much you need to borrow. Do not forget to take closing costs and homeowner's insurance into consideration when you calculate the amount you have to borrow.

2. Determine the term of the loan. Most fixed rate mortgages are either 15-year or 30-year term. You will pay a higher interest rate on longer terms, but you will have smaller monthly payments, so it may allow you to borrow a larger amount.

3. Determine the interest rate you will pay. This rate is set by the lender and is affected by your credit score, the term of the loan, and prevailing interest rates.

4. Divide your interest rate by 12 to find the monthly interest rate. For example, if your annual rate is 8 percent, your monthly interest rate would be 0.75 percent.

5. Use the following formula to calculate your monthly payment, where L is the loan amount, R is the monthly interest rate, and N is the number of months of the loan term.
   Monthly payment = L * ( ( R * (1+R) ^ N ) / ( (1+R) ^ (N-1) )
   For example, a mortgage of $200,000 at 8 percent interest over 30 years would give you a monthly payment of $1,511.25.

References

• How to Calculate Mortgage Payments
• Mortgage Formulas