Calculating a monthly mortgage payment isn’t that difficult once you understand the math behind the calculation. To calculate the payment, you will need three variables. The first variable is the total mortgage amount. To complete the calculation, you will need the monthly interest rate, which is the annual interest rate divided by 12. For example, if the annual interest rate is 3.92%, the monthly interest rate is .0392/12, or 0.003266667. Lastly, you will need the total number of months required to fully amortize the loan.
$, Monthly Payment = $, Mortgage Amount × (monthly interest rate
× (1 + monthly interest rate)n ÷ ((1 + monthly interest rate)n – 1]
The example below calculates the monthly payment for a loan of $420,000 over 30 years with a 3.92% interest rate.
$1,985.82 = $420,000 × (.0392/12 × (1 + .0392/12)360) ÷ ((1 + .0392/12)360−1)
No matter how you dissect the mortgage formula, you will always arrive at the same monthly payment. The variable that is not controlled by the borrower is the interest rate, which the bank sets on a frequent basis. All mortgages follow the same formula. Be sure to shop for the best interest rate before starting the loan process.