Understanding your mortgage helps you make better financial decisions. Instead of just accepting offers blindly, it’s wise to look at the numbers behind any loan—especially a significant loan such as a home loan.
Getting Started With Calculating Your Mortgage
People tend to focus on the monthly payment, but there are other important features you can use to analyze your mortgage, such as:
- Comparing the monthly payment for several different home loans
- Figuring how much you pay in interest monthly and over the life of the loan
- Tallying how much you actually pay off over the life of the loan versus the principal borrowed, to see how much you actually paid extra
Use the mortgage calculator below to get a sense of what your monthly mortgage payment could end up being,
The Inputs
Start by gathering the information needed to calculate your payments and understand other aspects of the loan. You need the details below. The letter in parentheses tells you where we’ll use these items in calculations (if you choose to calculate this yourself, but you can also use online calculators):
- The loan amount (P) or principal, which is the home-purchase price plus any other charges, minus the down payment
- The annual interest rate (r) on the loan, but beware that this is not necessarily the APR, because the mortgage is paid monthly, not annually, and that creates a slight difference between the APR and the interest rate
- The number of years (t) you have to repay, also known as the “term”
- The number of payments per year (n), which would be 12 for monthly payments
- The type of loan; for example, fixed-rate, interest-only, adjustable
- The market value of the home
- Your monthly income
Calculations for Different Loans
The calculation you use depends on the type of loan you have. Most home loans are standard fixed-rate loans.1 For example, standard 30-year or 15-year mortgages keep the same interest rate and monthly payment for their duration.
For these fixed loans, use the formula below to calculate the payment.2 Note that the carat (^) indicates that you’re raising a number to the power indicated after the carat.
Payment = P x (r / n) x (1 + r / n)^n(t)] / (1 + r / n)^n(t) – 1
Example of Payment Calculation
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
You can check your math with the Loan Amortization Calculator spreadsheet.
How Much Interest Do You Pay?
Your mortgage payment 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
