Q:

How can you compute mortgage payments?

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Quick Answer

To calculate the monthly payments on a fixed rate mortgage, use the following formula: M = P [ i (1 + i)^n ] / [ (1 + i)^n – 1], reports NerdWallet. This formula takes into account the principal, or the initial amount borrowed, along with other factors.

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Full Answer

The variable M stands for the monthly payment in this formula, according to NerdWallet. The variable P is the principal balance, and the variable i is the monthly interest rate. Most lenders provide borrowers with a yearly interest rate, so it is important to divide that rate by 12 to arrive at the monthly interest rate used in this formula. The variable n represents the number of monthly payments that must be made for the length of the loan. For example, a 30-year fixed-rate mortgage loan would involve 360 payments, or 12 times the number of years of the loan.

To arrive at a monthly payment, several variables must be known, notes NerdWallet. For example, the monthly payment for a $400,000 30-year loan at a yearly interest rate of 3.5 percent, or a monthly interest rate of 0.002917 percent, would be calculated as such: M = 400,000 [0.002917 (1 + 0.002917)^360 ] / [ (1 + 0.002917)^360 – 1]. This comes out to a monthly payment of $1,796.27.

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