How Mortgage Payments Are Calculated
Category: Calculation Basics
A standard fixed-rate mortgage payment is designed to amortize the loan over its term, a process known as amortization.
The Standard Formula
The formula used by the Mortgage Decision Engine for standard fixed-rate amortizing loans is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n - 1 ]
- M is the total monthly principal and interest payment.
- P is the principal (the initial loan amount).
- i is the periodic interest rate (the annual rate divided by the number of payments per year).
- n is the number of payment periods (e.g., 360 for a 30-year term with monthly payments).
Practical Example
For a $250,000 loan at a 6% annual rate for 30 years (360 months):
- Principal (P) = 250,000
- Monthly Rate (i) = 0.06 / 12 = 0.005
- Months (n) = 360
This produces a monthly principal-and-interest payment of about $1,498.88 before any lender-specific rounding.
Calculated vs. Estimated
Principal and interest are calculated from the loan terms entered. Your lender's payment may also include property taxes and insurance, often called PITI (Principal, Interest, Taxes, Insurance).