What is the formula for calculating monthly mortgage payments

Calculator Use

Calculate your monthly mortgage payments on your home based on term of your mortgage, interest rate, and mortgage loan amount. To include annual insurance and taxes in your calculations, use this mortgage calculator with taxes and insurance.

Monthly Payment Calculation

Monthly mortgage payments are calculated using the following formula:

\( PMT=\dfrac{PVi(1+i)^n}{(1+i)^n-1} \)

where n = is the term in number of months, PMT = monthly payment, i = monthly interest rate as a decimal (interest rate per year divided by 100 divided by 12), and PV = mortgage amount (present value).

Whether you use the formula or a mortgage calculator, calculating your potential mortgage payment should help you feel more informed on how to get a mortgage and your budget for buying a home, or to decide whether to move forward with a refinance. It all depends on your lifestyle and personal goals.

Below are some of the questions a mortgage calculator can answer.

Your Ideal Loan Term

As discussed above, loan term refers to how long you have to pay off a loan. Shorter terms mean higher monthly payments with less interest. Longer terms flip this scenario, meaning more interest is paid, but the monthly payment is lower.

When you’re looking at monthly payments, it’s important to balance dueling goals of affordability while at the same time trying to pay as little interest as possible.

One strategy that might be helpful is to put extra money toward the monthly principal payment when you can. This will result in paying less total interest over time than if you just made your regular monthly payment.

You can also take a look at recasting your mortgage to lower your payment permanently. When you recast, your term and interest rate stays the same, but the loan balance is lowered to reflect the payments you’ve already made. Your payment is lower because the interest rate and term remain.

One thing to know about recasting is that sometimes there’s a fee, and some lenders limit how often you do it or if they let you do it at all. However, it can be an option worth looking into, because it might be cheaper than the closing costs on a refinance.

The Best Home Loan Option For You

Any good calculator will help determine what might be a good loan product for you based on what you might qualify for. You’ll usually see several options.

It’s worth noting that you must qualify, so don’t take what the mortgage calculator says as gospel. A Home Loan Expert will better be able to tell you what you qualify for when they take a more detailed look at your financial history. However, it does give you a starting point in terms of things to think about.

Whether The Home Is Too Expensive

Another thing a mortgage calculator is very good for is determining how much house you can afford. This is based on factors like your income, credit score and your outstanding debt. Not only is the monthly payment important, but you should also be aware of how much you need to have for a down payment.

As important as it is to have this estimate, it’s also critical that you don’t overspend on the house by not considering emergency funds and any other financial goals. You don’t want to put yourself in a position where you’re house poor and unable to afford retiring or going on vacation.

Determining The Right Down Payment Amount

A purchase calculator can help you determine the down payment you need. There are minimum down payments for various loan types, but even beyond that, a higher down payment can mean a lower monthly payment and the ability to avoid mortgage insurance.

On the flip side, a higher down payment represents a more significant hurdle, particularly for first-time home buyers who don’t have an existing home to sell to help fund that down payment. The calculator can show you options so that you can balance the amount of the down payment with the monthly mortgage payment itself.

If You Should Rent Vs. Own A Home

There are many advantages to owning a home versus renting. Among them is the fact that you gain equity with each payment, as opposed to giving your money to a landlord. As an owner, you also gain the ability to paint your living room any color you desire.

However, there’s a mathematical piece to this as well. You have to know how much you need for a down payment, and whether owning a home will be cheaper or require you to pay more when looking at the monthly cost of homeownership.

In many cases, it’s better to get a mortgage, because the rate can be fixed for the life of the loan. There are very few controls that can stop landlords from raising your rent every year if they want to. You can lock in your interest rate sooner rather than later by starting the approval process early. This will ensure you're prepared to lock in as soon as your loan officer gives you the go-ahead. With rates projected to rise, getting a lock in early could help you save money on your mortgage.

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