How Are Mortgage Payments Calculated?


Quick Answer

The exact formula for calculating mortgage payments depends on the type of loan. For a common fixed-interest mortgage, the standard formula is P = LoanAmt [i(1 + i)n]/[(1 + i)n - 1], where i is the monthly interest rate and n is the number of payments, according to banking expert Justin Pritchard for About.com.

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Full Answer

Calculating principal and interest payments is more complex for adjustable interest and balloon payment loans than for fixed-rate loans, explains Pritchard. Bankrate and other online financial resources offer automated payment calculators that determine monthly mortgage payments. By entering in the loan amount, the interest rate and the length of the loan, a potential home buyer can estimate the monthly payment for the type of loan he is considering.

The monthly mortgage payment is not necessarily the entire out-of-pocket cost of owning a home. To fully understand how much a home costs each month, a buyer must understand additional factors about the loan and other expenses paid by the homeowner. Other key costs, reports CNN Money, include property taxes and insurance premiums.

In addition, if the loan amount exceeds 80% of the total value of the home, lenders also require the buyer to pay primary mortgage insurance, or PMI, each month. PMI protects the lender against losses on the home if the buyer fails to pay back the loan, states the U.S. Department of Housing and Urban Development. Once the buyer meets the 20 to 22 percent equity stipulation, the lender is required under the PMI Act to automatically cancel the PMI, which lowers the overall monthly payment.

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