How to Calculate Mortgage Payments
A mortgage is a loan, often taken for financing property, which also serves as the collateral for it. The borrower is liable to make regular payments to pay off the debt along with the interest on it, which is quoted as a percentage of the principal amount. Making regular payment is important, if you want to maintain a good credit history and retain the property collateral to the loan. While interest payments are generally calculated for you when you sign up, you can also calculate them yourself following the steps listed below.
M = P[i(1+i)^n]/[(1+i)^n -1] is the equation you will be using to calculate your monthly mortgage payments. ‘M’ in this equation stands for the monthly payment (and will be your answer), ‘P’ denotes the principal amount (the borrowed money), ‘i’ is for the interest rate and ‘n’ is for the number of payments you need to make.
‘M’ and ‘P’ both denote sums of money and should be in the same currency unit for consistency. The interest rate needs to be converted into a decimal fraction with a simple method. If for instance, the interest rate is 8 percent, you can convert it into decimal form using 8/100, which will give you 0.08.
After having converted the interest rate into decimal form, you will need to find out the monthly interest value, since the interest rate quoted is usually annual. In order to find out the monthly value, you will need to divide the annual interest rate by 12. This will give you 0.08/12.
The number of total mortgage payments you need to make is denoted by ‘n’. In order to calculate these, you will need to multiply the term of the mortgage (usually in years) with 12. If the term of your mortgage is 30 years, the number of payments you need to make will equal 30 x 12 = 360.
Using this equation, if your principal amount equals 100,000 and the interest rate is 8% for a 30-year mortgage your monthly payment will be found out using the following calculations:
- M = P[i(1+i)^n]/[(1+i)^n -1]
- M = 100000 [0.08/12 (1 + 0.08/12)^360] / [(1+0.08/12)^360 – 1]
- M = 100000 [0.006666667 x (1.006666667)^360] / [(1.006666667)^360 – 1]
- M = 100000 [0.006666667 x 10.9357427] / [10.9357427 – 1]
- M = 100000 [0.07290495] / [9.9357427]
- M = 100000 x 0.007337645
- M = $ 733.7645
