How to calculate monthly mortgage
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If you’re planning to purchase a new home, it’s crucial to have a clear understanding of your monthly mortgage payments. Knowing how much you’ll have to pay each month can help you make informed decisions, stay within your budget, and prevent any unwelcome surprises down the road. In this article, we’ll guide you through the process of calculating your monthly mortgage payments using a simple formula.
To start, gather the following information:
1. Principal Loan Amount (P) – The total amount of money you’ve borrowed.
2. Annual Interest Rate (r) – The rate at which your loan accrues interest annually.
3. Loan Term (t) – The number of years you have to pay back the mortgage.
Now, let’s break down the formula for calculating your monthly mortgage payment (M):
M = P [r(1+r)^t] / [(1+r)^t – 1]
Sounds complicated, right? Don’t worry! Let’s walk through an example step by step.
Step 1: Convert Annual Interest Rate
First, take your annual interest rate (r) and divide it by 12 months to obtain the monthly interest rate. For example, if your annual interest rate is 5%, you would perform the following calculation: (5%/100)/12 = 0.05/12 = 0.004167.
Step 2: Calculate (1+r)^t
Next, add one to the previously obtained monthly interest rate and raise it to the power of the number of total payments you’ll make over the life of the loan. If you have a 30-year mortgage with payments due every month, there will be a total of 360 payments (30 years × 12 months). In our example with a monthly interest rate of 0.004167 and a loan term of 30 years, this calculation would be: (1 + 0.004167)^(30 × 12) ≈ 1.6416.
Step 3: Calculate the Numerator
Multiply the principal loan amount (P) with the result obtained in Step 2, and then multiply this product by the monthly interest rate. In our example, if you borrowed $300,000, this calculation would be: $300,000 × 1.6416 × 0.004167 ≈ $2049.09.
Step 4: Calculate the Denominator
Subtract one from the result obtained in Step 2 before multiplying by the monthly interest rate. In our example, this calculation would be: (1.6416 – 1) ÷ 0.004167 = 153.879
Step 5: Calculate Your Monthly Mortgage Payment
Finally, divide the numerator found in Step 3 by the denominator found in Step 4 to obtain your monthly mortgage payment (M). In our example, this calculation would be: $2049.09 ÷ 153.879 ≈ $13.32.
With these steps, you can now easily calculate how much you will have to pay each month to pay off your mortgage over time. Remember that other costs such as property taxes, homeowners insurance, and homeowners association fees may also come into play when determining your overall monthly housing expenses. Chat with a financial advisor or lender to help you navigate these costs and find a suitable mortgage solution for your specific situation. Happy house hunting!