Calculating a 30-year fixed-rate mortgage is a straightforward task. In order to find out what your monthly payments might be, you can use a mortgage formula or a calculator. This will give you a good estimation of whether you can afford the mortgage. Home loans are amortized over 30 years with monthly payments that are the same each month. As you begin to pay your mortgage, you will actually pay more in interest. Over time, as the loan decreases, more of your money goes toward the principal. Show
When you take out a mortgage, you’ll pay a fixed amount each month (if you have a fixed rate mortgage: read on to learn more). This can be a bit tricky to figure out: we’re big fans of using a mortgage calculator to make an estimate. If you just want to figure out your payments, try this one by moneysavingexpert: we think it’s excellent. If you’d like to learn how to calculate mortgage repayments yourself, read on! Why is it so complicated?It would be easy to figure out a mortgage payment if the numbers didn’t change over time. Unfortunately for us, they do—quite a bit. Banks need to make money off the money they lend, so they charge interest on a loan. Mortgage interest is basically the fee the bank charges you to borrow money. There’s an old story that Albert Einstein called compound interest the “most powerful force in the universe.” While we’re not sure if it’s worthy of that much praise, it is quite powerful. The word “compound” makes things more difficult for us. If you borrow £10,000 for 10 years at 2% simple interest, you’ll pay £200 in interest each year: that's quite simple. However, if you borrow with compound interest, we have to calculate the interest every time you make a payment. Mortgages in the UK use compound interest, so the math goes like this:
Tricky, right? This is also the reason interest rates are so important: if you had a 5% interest rate in the above example, you’d pay almost £1,000 more in interest. Imagine what would happen if it were a £400,000 mortgage over 25 years! (Hint: it’s not pretty) What about variable rates?We’ve been talking about fixed rates so far, where the interest rate doesn’t change. In a variable rate mortgage, your interest rate can change, often at the whim of the bank. Usually, this variable rate is determined by the Bank of England’s bank rate, plus two or three percent. On a standard variable rate, the lender has total control over your interest rate. If you thought compound interest was tricky, variable rates are positively devilish. Most banks just quote a “cost for comparison:” this is an educated guess of what your average interest rate will be if you stay on that mortgage. These educated guesses are about as good as we can do: if you do figure out how to predict interest rates accurately, call us. (It’s very difficult.) This is important because most mortgages have a fixed rate for a short period: 2-5 years, typically. The day your mortgage leaves this introductory rate, you’ll be paying a variable rate, and your payments can change every month! What's the formula for calculating mortgage payments?For the maths-inclined among us, the mortgage payment formula isn’t that complicated. Just remember, this doesn’t account for variable rates, which can change. You’ll need these numbers to get started:
Here’s the formula: If we wanted to figure out the payment for an average mortgage, it might look like this:
If you can’t tell from the points above, this is a £350,000 mortgage at 3.3% APRC and a 25-year term. Let’s plug those numbers into the formula: And we'll simplify: And that’s it! It may not be as easy as a calculator, but it's quite possible to do yourself. If you enjoyed this article, don’t forget to subscribe for updates here. Thanks for reading! What is the rule of thumb for monthly mortgage payment?The 28% rule states that you should spend 28% or less of your monthly gross income on your mortgage payment (e.g. principal, interest, taxes and insurance). To determine how much you can afford using this rule, multiply your monthly gross income by 28%.
How do you calculate monthly principal and interest payments?Amortizing loans. Divide your interest rate by the number of payments you'll make that year. ... . Multiply that number by your remaining loan balance to find out how much you'll pay in interest that month. ... . Subtract that interest from your fixed monthly payment to see how much in principal you will pay in the first month.. What is the formula to calculate a mortgage payment in Excel?To figure out how much you must pay on the mortgage each month, use the following formula: "= -PMT(Interest Rate/Payments per Year,Total Number of Payments,Loan Amount,0)". For the provided screenshot, the formula is "-PMT(B6/B8,B9,B5,0)".
What is the formula for calculating principal payment?What Is Your Principal Payment? The principal is the amount of money you borrow when you originally take out your home loan. To calculate your mortgage principal, simply subtract your down payment from your home's final selling price.
|