How to Calculate Mortgage | complete Fomula & Steps

Do you want to know how to calculate a mortgage? Do you know you can calculate your monthly payment by using a mortgage calculator or by doing it by hand?

Calculating your mortgage by hand is beneficial because you’ll learn how different factors work together to affect your monthly rate. These factors include the total amount you’re borrowing from a bank, the interest rate for the loan, and the amount of time you have to pay back your mortgage in full.

In this article, you will get to know how you can calculate a mortgage, how to calculate principal and monthly payments, the example of the monthly payments, and lots more.

How to Calculate Mortgage

Mortgages and mortgage lenders are often a necessary part of purchasing a home, but it can be difficult to understand what you’re paying for and what you can actually afford.

To figure your mortgage payment, start by converting your annual interest rate to a monthly interest rate by dividing by 12. Next, add 1 to the monthly rate. Third, multiply the number of years in the term of the mortgage by 12 to calculate the number of monthly payments you’ll make. Fourth, raise the result of 1 plus the monthly rate to the negative power of the number of monthly payments you’ll make. Fifth, subtract that result from 1. Sixth, divide the monthly rate by the result. Last, multiple the result by the amount you borrowed.

Let say you borrowed $265,000 on a 15-year mortgage at 4.32 percent. Start by dividing 0.0432 by 12 to find that the monthly rate equals 0.0036. Next, add 1 to 0.0036 to get 1.0036. Third, multiply 15 years by 12 payments per year to find that your loan consists of 180 monthly payments. Fourth, raise 1.0036 to the negative 180th power to get 0.5237. Fifth, subtract 0.5237 from 1 to get 0.4763. Sixth, divide 0.0036 by 0.4763 to get 0.00755826. Finally, multiply 0.00755826 by $265,000 to find your monthly payment will be $2,002.93.

How to calculate principal and monthly payment

To estimate your monthly mortgage payment, you can use a mortgage calculator. It will provide you with an estimate of your monthly principal and interest payment based on your interest rate, down payment, purchase price and other factors.

Gather these data points to calculate your monthly mortgage payment:

  • Home price
  • Down payment amount
  • Interest rate
  • Loan term
  • Taxes, insurance and any HOA fees
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Example of Monthly payment

For your mortgage calc, you’ll use the following equation:

M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1].

Here’s a breakdown of each of the variables:
  • M = Total monthly payment
  • P = The total amount of your loan
  • I = Your interest rate, as a monthly percentage
  • N = The total amount of months in your timeline for paying off your mortgage
Suppose you borrow $100,000 at 6% for 30 years, to be repaid monthly. What is the monthly payment? The monthly payment is $599.55.

Plug those numbers into the payment formula:

{100,000 x (.06 / 12) x [1 + (.06 / 12)^12(30)]} / {[1 + (.06 / 12)^12(30)] – 1}

(100,000 x .005 x 6.022575) / 5.022575
3011.288 / 5.022575 = 599.55

How much interest do you need to pay?

Your mortgage payments is important but you also need to know how much of it gets applied to interest each month. A portion of each monthly payment goes toward your interest cost, and the remainder pays down your loan balance. Note that you might also have taxes and insurance included in your monthly payment, but those are separate from your loan calculations.3

An amortization table can show you month by month exactly what happens with each payment. You can create amortization tables by hand, or use a free online calculator and 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 whether you want to save money by:

  • Borrowing less (by choosing a less-expensive home or making a larger down payment)
  • Paying extra each month
  • Finding a lower interest rate
  • Choosing a shorter-term loan (15 years instead of 30 years, for example) to speed up your debt repayment

Factors that influence the type of mortgage

Finding the best mortgage for your prospective home you need to understand the types of loans you’re able to pursue. The factors below can influence the types of mortgages you’ll qualify for:

  • Estimated down payment: The size of your down payment can impact the mortgage rate lenders will give.
  • Monthly mortgage payment: Mortgage lenders will look at your income and assets to determine the total loan amount you can afford to pay back. When calculating your budget for your monthly mortgage payment, consider the principal amount, interest and taxes, mortgage insurance, utilities and any homeowner’s fees.
  • Credit score: Your credit score will play a large role in determining the interest rate on your loan.

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