3/1/2014 How to Calculate Mortgage Payments (with Examples) - wikiHow

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How to Calculate Mortgage Payments
Mortgage Payment Help Examine the Equation for Mortgage Payments Calculate the Mortgage
Payments Examine the Effect of the Loan Term on Interest
a specific type of loan for which the collateral is real property. The loan amount
is therefore less than or equal to the sell price of the real estate. The interest on
a mortgage loan is a fee that you pay for borrowing money. Its typically
provided as a rate, meaning that the interest is a given fraction of the principle.
There are a variety of ways in which a borrower may make mortgage payments
to the lender.
Mortgage Payment Cheat Sheet Mortgage Payment Calculator
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Use the following equation M = P[i(1+i)^n]/[(1+i)^n -1] to calculate the monthly
payment of a mortgage loan. The monthly payment is M, the principal (amount of
the loan) is P, the interest rate is i and the number of payments to make is n.
Define M and P as monetary values. They must be expressed in units of the same
currency in order to use this formula.
Convert the interest rate i into a decimal fraction. The interest rate must be
expressed as a decimal fraction instead of a percentage. For example, if the interest
rate is given as 7 percent, use the value 7/100 or 0.07.
Convert the annual interest rate to the monthly rate. An interest rate is typically
given as an annual rate, while the interest on a mortgage loan is typically
Mortgage Payment Help
Method 1 of 3: Examine the Equation for Mortgage Payments
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compounded monthly. In this case, divide the annual interest rate by 12 to get the interest
rate for the compounding period (monthly rate). For example, if the annual interest rate is 7
percent, divide the decimal fraction 0.07 by 12 to get the monthly interest rate of 0.07/12. In
this example, substitute 0.07/12 for i in the equation given in step 1.
Define N as the total number of monthly payments required to pay off the
loan. Typically, the loan period is given in years while the payments are made
monthly. In this case, multiply the term of the loan by 12 to get the number of monthly
payments to make. For example, to calculate the payments on a 20 year loan, use 20 x 12
= 240 for the value n in the equation in step 1.
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Determine the monthly payments on a $100,000 mortgage with an annual
interest rate of 5 percent and a loan term of 15 years. Assume the interest is
compounded monthly.
Calculate the interest rate i. The interest rate as a decimal fraction is 5/100 or 0.05.
The monthly interest rate i is therefore 0.05/12 or about 0.00416667.
Calculate the number of payments n. This is 15 x 12 = 180.
Calculate the term (1+i)^n. This is given as (1 + 0.05/12)^180 = about 2.1137.
Use P = 100,000 for the principle of the loan.
Solve the following equation M = P[i(1+i)^n]/[(1+i)^n -1] to calculate the
monthly payment. M = 100,000 x [0.00416667 x 2.1137/2.1137 1] = 790.79. The
monthly payment on this loan would be $790.79.
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Assume the mortgage has a 10-year term instead of 15-year term. There are
now 10 x 12 = 120 payments, so the term (1+i)^n = (1 + 0.05/12)^120 = about 1.647.
Method 2 of 3: Calculate the Mortgage Payments
Method 3 of 3: Examine the Effect of the Loan Term on Interest
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Solve the following equation M = P[i(1+i)^n]/[(1+i)^n -1] to calculate the
monthly payment. M = 100,000 x [0.00416667 x 1.647/1.647 1] = 1,060.66. The
monthly payment on this loan would therefore be $1,060.66.
Compare the total payout between the 10-year mortgage and 15-year
mortgage, both with 5 percent interest. The total payout for the 15-year loan is
180 x 790.79 = $142,342.20 and the payout for the 10-year loan is 120 x 1,060.66 =
127,279.20. Reducing the term of this loan by 5 years reduces the interest on the loan by
$142,342.20 $127,279.20 = $15,063.00.
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Categories: Mortgages and Loans
Recent edits by: Maluniu, Krystle, Jordan
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