Monthly Payment Calculation

In this post I will explain how to calculate what your monthly payment will be for a specific mortgage. For this calculation we need three numbers: the loan amount, the loan term and the interest rate. LA = Loan Amount I = Interest rate per payment period. Take the yearly rate as a decimal (6% = 0.06) and divide that by 12 for a monthly payment, or 24 for a semi-monthly payment (0.06/12 = .005) N = Number of payment periods. Multiply the length of the loan in years by 12 for monthly payments or 24 for semi-monthly. We can then use these numbers in the following equation: Payment = LA * ((I)(1+I)^N) / (((1+I)^N) - 1) Here is an example for a $100,000 loan for 30 years at 6% interest with payments made monthly: Payment = 100,000 * ((.005)(1.005)^360) / ((1.005^360) - 1) Payment = 100,000 * (.005)(6.02257) /5.02257 Payment = $599.55 From this calculation you can also find the total amount that you will pay over the life of the mortgage. In this case take the monthly payment and multiply by the total number of payments ($599.55 * 360 = $215,838). You can see that borrowing $100,000 at 6% will end up costing you $115,838 in interest over the 30 year life of the loan. However, at the end of the loan your house should be worth much more than at the start. An annual growth rate of 2.6% over the 30 years yields a final value of just under $216,000, which would offset the cost of the credit.