How to Figure Mortgage Interest Rates & Payments
When it comes to purchasing a home, many people want to know how much their monthly payments are going to be. And while there are certainly a number of mortgage calculators available, sometimes it is nice to know just how the equation is calculated. Here's how to calculate the mortgage rates and payments for a home loan you are trying to secure.
Other People Are Reading
Instructions
-
-
1
Get the variables of the loan you are trying to secure. Any home loan has the same three variables. There is the term of the loan, the amount of money to be borrowed, and the interest rate at which you are borrowing the money. As an example, let's say that Fred is trying to calculate the payments for a $300,000 loan, at six percent interest which is fixed for 30 years.
-
2
Calculate the interest as it relates to the loan. You need to convert the interest into a decimal before it is plugged into the equation. To do so divide the interest rate by 1200. (This calculates monthly compounding interest). In the example dividing 6 / 1200 results in .005.
-
-
3
Plug the variables into the mortgage equation. The equation for a fixed mortgage is the following:
Mortgage Payment = Principal [ Interest (1 + Interest) ^ Number of Payments] / (1 + Interest) ^ Number of Payments
So in the example the equation would read:
MP = 300,000 [ .005 ( 1 + .005) ^ 360 / (1 + .005) ^ 360 - 1
Once the calculation has been performed the answer is $1798.65. This the amount of the monthly payment with principal and interest.
-
4
Calculate the amount of interest and principal using the result of the previous equation. To calculate how much is going to interest and how much is going toward principal plug the numbers into the following equation:
Loan Amount x Interest (in monthly form) = Amount of Interest Paid
$300,000 x .005 = $1,500. That means of the $1800 payment, about $1500 went to principal.
To perform the calculation for the next month subtract the principal reduction and do the equation again. Once you have done it 360 times, you have created an amortization table for a 30-year fixed-rate loan.
-
1
References
- Photo Credit money money image by Valentin Mosichev from Fotolia.com
