How Is a Mortgage Interest Rate Formula Calculated?


Quick Answer

The Annual Percentage Rate for mortgage interest is calculated in two steps, according to Bankrate. First, solve for the APR payment amount. This number will be different from the actual payment amount. Next, determine what interest rate is required to get the APR payment amount.

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Full Answer

The formula to calculate the APR payment amount is a complex equation requiring a computer or advanced calculator, as reported by Mortgage Professor. Several websites offer mortgage calculators to assist potential borrowers with the calculation, including Bankrate and Mortgage Calculator. Bank websites that offer mortgage loans also provide online calculators, such as Bank of America.

Variables in the APR payment amount calculation are home value, interest rate, length of loan, down payment, points, origination fees and closing costs, as stated by Mortgage Calculator. The complexity of the calculation is due to compounding. Interest is charged on the loan amount and all fees combined. Every month, the interest is added to the remaining balance and results in the actual interest rate paid being higher than the stated loan interest rate. With reputable lenders, the APR will not be much higher and the Truth in Lending Act requires lenders to disclose this information in the loan paperwork.

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