How to Calculate Your Mortgage Payment
Understanding your mortgage helps you make better decisions. Instead of just taking whatever you get, it pays to look at the numbers behind any loan – especially a big loan like a home loan.
To calculate a mortgage, you’ll need a few details about the loan. Then, you can do it all by hand or use free online calculators (or a spreadsheet) to crunch the numbers.
Most people only focus on the monthly payment, but there are other important details that you need to pay attention to.
We’ll start with calculating the payment, and we’ll also look at how much you pay in interest and how much you actually pay off – in other words, how much of your house you’ll actually own.
To calculate (and understand) the payments, gather the following information about a potential mortgage loan:
- The loan amount (or principal)
- The interest rate on the loan (not necessarily the APR, which also includes closing costs)
- The number of years you have to repay (also known as the term)
- The type of loan: fixed rate, interest only, etc.
- The market value of the home
- Your monthly income
Calculations for Different Loans
The calculation you use will depend on the type of loan you have. Most home loans are fixed-rate loans (for example, standard 30-year or 15-year mortgages).
For those loans, the formula is:
Loan Payment Amount / Discount Factor
You’ll use the following values:
- Number of Periodic Payments (n) Payments per year times number of years
- Periodic Interest Rate (i) Annual rate divided by number of payments per
- Discount Factor (D) <[(1 i) ^n] - 1>/ [i(1 i)^n]
Example: assume you borrow $100,000 at 6% for 30 years to be repaid monthly. What is the monthly payment (P)?
- D 166.7916 ( <[(1 .005)^360] - 1>/ [.005(1 .005)^360])
- P A / D 100,000 / 166.7916 599.55
How Much Goes Towards Interest?
Your mortgage payment is important, but you’ll also want to know how much you lose to interest each month. A portion of each monthly payment is your interest cost, and the remainder goes towards paying down your loan (you might also have taxes and insurance included in your monthly payment).
An amortization table can show you – month-by-month – exactly what happens with each payment. You can create an amortization table by hand, or use a free calculator or spreadsheet to do the job for you. Take a look at how much total interest you pay over the life of your loan. With that information, you can decide if you want to save money by:
- Borrowing less
- Paying extra each month
- Finding a lower interest rate
- Choosing a shorter term loan (15 years instead of 30 years, for example)
Interest Only Loan Payment Calculation Formula
Interest-only loans are much simpler to calculate. For better or worse, you don’t actually pay down the loan with each required payment (although you can usually pay extra each month if you want).
Example: assume you borrow $100,000 at 6% interest-only with monthly payments.
What is the payment (P)?
Loan Payment Amount x (Interest Rate / 12)
Check your math with the Interest Only Calculator.
Your interest only payment is $500, and it will remain the same until:
- You make additional payments (which will reduce your loan balance – but your required payment might not change right away), or
- After a certain number of years you’re required to start making amortizing payments, or
- You make a balloon payment to pay off the loan entirely
Figure Out How Much you Own (Equity)
You might also want to know how much of your home you actually own. Of course, you own the home but until it’s paid off, your lender has a lien on the property so it’s not free-and-clear. The amount that’s yours – your home equity – is the home’s market value minus any outstanding loan balance.
There are several reasons you might want to calculate your equity.
Your loan to value (LTV) ratio is important because lenders look for a minimum ratio before approving loans. If you want to refinance or figure out how big your down payment needs to be, you need to know the LTV ratio.
Your net worth is based on how much of your home you actually own. Having a million dollar home doesn’t do you much good if you owe $999,999 on the property.
You can borrow against your home using second mortgages and home equity lines of credit (HELOCs). But most lenders need to see an LTV below 80% to approve a loan.
Can you Afford the Loan?
Lenders often offer you the largest loan that they’ll approve you for. This is typically based on their standards for an acceptable debt to income ratio. However, you don’t need to take the full amount – and it’s often a good idea to borrow less.
Before you apply for loans, look at your monthly budget and decide how much you’re comfortable spending on a mortgage payment. After you’ve made a decision, start talking to lenders and looking at debt to income ratios. If you do it the other way around, you might start shopping for more expensive homes (and you might even buy one – which will affect your budget and leave you vulnerable to surprises). It’s better to buy less and have some wiggle room than to suffer just to keep up with payments.