How To Calculate Principal And Interest Payment

Determine Your Mortgage Principal

The initial loan amount is referred to as the mortgage principal.

For example, someone with $100,000 cash can make a 20% down payment on a $500,000 home, but will need to borrow $400,000 from the bank to complete the purchase. The mortgage principal is $400,000.

If you have a fixed-rate mortgage, you’ll pay the same amount each month. With each monthly mortgage payment, more money will go toward your principal, and less will go toward paying interest.

Read more:The average monthly mortgage payment by state, city, and year

Calculate Weekly Monthly Quarterly And Semi

Depending on the payment frequency, you need to use the following calculations for rate and nper arguments:

• For rate, divide the annual interest rate by the number of payments per year .
• For nper, multiply the number of years by the number of payments per year.

The below table provides the details:

For instance, to find the amount of a periodic payment on a $5,000 loan with an 8% annual interest rate and a duration of 3 years, use one of the below formulas.

Weekly payment:

=PMT

Monthly payment:

=PMT

Quarterly payment:

=PMT

Semi-annual payment:

=PMT

In all cases, the balance after the last payment is assumed to be $0, and the payments are due at the end of each period.

The screenshot below shows the results of these formulas:

Installment And Revolving Credit Payments

Installment credit represents borrowing usually associated with the two major purchases concerning consumers: Homes and vehicles. Repayment terms vary, according to lender terms and how much money is borrowed, but monthly payments always contain interest obligations. Each installment also contains a contribution toward repaying principal, which is based on loan size and amortization schedule. From the moment you initiate your installment loan, it is possible to look at a comprehensive payment schedule, outlining your repayment obligations over the course of the loan’s life. If your financing is structured using fixed rates then the schedule only changes if you pay ahead, which is allowed under some installment contracts. In other words, there are no surprises for consumers, who know exactly what their monthly home mortgage payments and vehicle loan obligations will be.

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Bankrate follows a strict editorial policy, so you can trust that were putting your interests first. All of our content is authored by highly qualified professionals and edited by subject matter experts, who ensure everything we publish is objective, accurate and trustworthy.

Our loans reporters and editors focus on the points consumers care about most the different types of lending options, the best rates, the best lenders, how to pay off debt and more so you can feel confident when investing your money.

Amortized Loan: Fixed Amount Paid Periodically

Many consumer loans fall into this category of loans that have regular payments that are amortized uniformly over their lifetime. Routine payments are made on principal and interest until the loan reaches maturity . Some of the most familiar amortized loans include mortgages, car loans, student loans, and personal loans. The word “loan” will probably refer to this type in everyday conversation, not the type in the second or third calculation. Below are links to calculators related to loans that fall under this category, which can provide more information or allow specific calculations involving each type of loan. Instead of using this Loan Calculator, it may be more useful to use any of the following for each specific need:

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Fixed Rate Vs Adjustable Rate

A fixed rate is when your interest rate remains the same for your entire loan term. An adjustable rate stays the same for a predetermined length of time and then resets to a new interest rate on scheduled intervals. A5-year ARM, for instance, offers a fixed interest rate for 5 years and then adjusts each year for the remaining length of the loan. Typically the first fixed period offers a low rate, making it beneficial if you plan to refinance or move before the first rate adjustment.

Consider The Cost Of Property Taxes

A monthly mortgage payment will often include property taxes, which are collected by the lender and then put into a specific account, commonly called an escrow or impound account. At the end of the year, the taxes are paid to the government on the homeowners’ behalf.

How much you owe in property taxes will depend on local tax rates and the value of the home. Just like income taxes, the amount the lender estimates the homeowner will need to pay could be more or less than the actual amount owed. If the amount you pay into escrow isn’t enough to cover your taxes when they come due, you’ll have to pay the difference, and your mortgage payment will likely increase going forward.

You can typically find your property tax rate on your local government’s website.

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How To Lower Your Monthly Loan Payment

If your monthly loan payments are more than you can comfortably afford or are interfering with other financial goals, such as saving for retirement, finding a way to reduce them may be ideal. You have several options, depending on where you are in the process.

If you havent yet borrowed money, you can get a lower payment by borrowing less. For example, if youre purchasing a house or car, increasing your down payment can mean you end up with a smaller mortgage or car loan. Alternatively, you can look for homes or cars with lower prices to get a loan that better aligns with your budget.

If you already have a loan, there are several ways to reduce the monthly payment. One option is to refinance. When you refinance, you take out a new loan and use the principal from the new loan to pay off the current one. Refinancing often means getting a lower interest rate, giving you a lower monthly payment. You can also extend the loan term with a refinance, giving you more time to repay.

Similarly, you can consolidate your loans to get a lower monthly payment. For example, if you have multiple student loans with different interest rates and terms, consolidating them into a single loan can mean you pay less each month. You also get to enjoy a streamlined loan repayment as you dont have to juggle multiple monthly payments.

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How Much Of Your Mortgage Is Going Toprincipal And Interest

The InfoChoice Principal and Interest Calculator makes it easy to see how much of your mortgage repayment is going towards principal and interest every month.

Just enter the loan amount, term length, interest rate and any repayments to get a complete breakdown of where your mortgage payments are going. The principal and interest rates calculator also shows you how much principal versus interest has been paid to date, so you can see how much equity you’ve built up.

As you can see, most of your home loan repayment goes towards interest rates in the early years of your home loan, as the principal balance is paid off over time.

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What Is Your Interest Payment

The second major part of your monthly mortgage payment is interest. Interest is money you pay to your mortgage lender in exchange for giving you a loan. Most lenders calculate and determine your mortgage rate in terms of an annual percentage rate . is the actual amount of interest that you pay on your loan per year . For example, if you borrow $100,000 at an APR of 5%, youd pay a total of $5,000 per year in interest. At the beginning of your loan , most of your monthly payment goes toward paying off interest.

Just a few percentage points of interest can make a huge difference in how much you eventually end up paying for your loan. For example, lets say you borrow $150,000 at a 4% interest on a 30-year loan. With this loan, your monthly payment would be $716. If you take the same loan with a 6% interest rate, youd pay $899 each month.

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Other Things That You Might Have To Pay For Monthly

Your mortgage payment consists of principal and interest . But you may have other monthly expenses. Consider all these additional costs in your monthly budget when deciding whether you can afford extra payments to pay down your mortgage principaland how much to pay.

PITI

The most common additional payments are taxes and insurance . Together, the payment is commonly called PITI.

Your lender will apply the principal and interest to your home loan and put the taxes and insurance payments in an escrow account. Then, your lender pays the tax bill and annual insurance premium out of escrow when they come due each year.

PMI

You need to budget private mortgage insurance if your down payment is less than 20% of the home price.

HOA fees

Homeowners association fees are also common monthly expenses for communities like condos or subdivisions.

How Long Does The Approval Process Usually Take

The length of the approval process will depend on the lender type. For credit unions and banks, the approval process can take anywhere between a few days to a few weeks. Banks normally have stricter loan processes and higher approval standards than nonbank lenders.

If applicants opt to lend from peer-to-peer lenders, loans can get approved within a few minutes up to a few business days. Approvals tend to be faster if the applicant has already prepared all of the needed documents and other information beforehand. Repeat borrowers are likely to be approved quickly if they repaid on time during previous loans.

Online direct lenders tend to have the fastest processing periods. The application process usually takes a few minutes, and if applicants submit all of the needed documents, financing can be approved almost immediately.

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Breakdown Of Mortgage Payments

Its important to understand your mortgage payment structure so that you can find ways to save money. Lets take a look at mortgage payments and their payment breakdowns.

Your mortgage principal balance and your mortgage interest will change during your mortgage term, but something that doesnt change is your monthly payment amount. Your selected amortization period determines your monthly payment amount which will be fixed for the duration of your term. When you first get a mortgage, most of your monthly payment will go towards interest. You havent had time to pay down your mortgage balance yet, and so when interest is charged, youll need to pay interest on a higher mortgage balance.

As time passes by and your balance decreases, there is less balance remaining for interest to be charged. This reduces the proportion of interest charged compared to your monthly payment. The amount remaining can then go towards paying down your mortgage balance further. This is similar to compound interest but in reverse.

• Mortgage Principal Balance: $500,000

Get A More Accurate Estimate

Get pre-qualified by a lender to see an even more accurate estimate of your monthly mortgage payment.

• How much house can you afford? Use our affordability calculator to estimate what you can comfortably spend on your new home.

• Pig

  Interested in refinancing your existing mortgage? Use our refinance calculator to see if refinancing makes sense for you.

• Dollar Sign

  Your debt-to-income ratio helps determine if you would qualify for a mortgage. Use our DTI calculator to see if youâre in the right range.

• Award Ribbon VA mortgage calculator

  Use our VA home loan calculator to estimate payments for a VA loan for qualifying veterans, active military, and military families.

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Lenders Use Different Methods

Different lenders use different methods to calculate loan repayment schedules depending on their needs, borrowers needs, the institutions interest rate policy , the length of the loan, and the purpose of the borrowed money. Typically, home mortgage loans, automobile and truck loans, and Consumer installment loans are amortized using the equal total payment method.

The Farm Service Agency equires equal total payments for intermediate and long-term loans.

The Federal Credit Services uses the equal total payment method for many loans. Under certain conditions the FCS may require that more principal be repaid earlier in the life of the loan, so they will use the equal principal payment method. For example, in marginal farming areas or for ranches with a high percentage of grazing land in non-deeded permits, FCS may require equal principal payments.

Production Credit Associations usually schedule equal principal payment loans for intermediate term purposes. Operating notes are calculated slightly differently. Other commercial lenders use both methods.

The reason for the difference in amounts of interest due in any time period is simple: Interest is calculated and paid on the amount of money that has been loaned but not repaid. In other words, interest is almost always calculated as a percentage of the unpaid or remaining balance: I = i x R

Where:

R = unpaid balance.

Know About Your Interest & Principal With Paysense

It is essential to know the interest and principal components of your loan not only for the entire tenure but also for each month. You can use the PaySense loan EMI calculator to see the EMI options for your loan and total interest for different loan terms. And to calculate the principal and interest component in EMI of a particular month, use any of the above two methods.

Knowing your outstanding principal amount makes it easier for you to calculate the best time to pre-pay your loan. If you get some money from some unexpected avenue and want to unburden yourself of the monthly EMI and pay up in full, or if you happen to be thinking in those terms.

PaySense offers instant personal loans from Rs. 5000 to Rs. 5 lakh at flexible loan tenures and EMIs. Download the PaySense personal loan appnow.

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How Do Property Taxes Work

When you own property, youre subject to taxes levied by the county and district. You can input your zip code or town name using our property tax calculator to see the average effective tax rate in your area.

Property taxes vary widely from state to state and even county to county. For example, New Jersey has the highest average effective property tax rate in the country at 2.42%. Owning property in Wyoming, however, will only put you back roughly 0.57% in property taxes, one of the lowest average effective tax rates in the country.

While it depends on your state, county and municipality, in general, property taxes are calculated as a percentage of your homes value and billed to you once a year. In some areas, your home is reassessed each year, while in others it can be as long as every five years. These taxes generally pay for services such as road repairs and maintenance, school district budgets and county general services.

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Calculate The Monthly Interest Rate

The interest rate is essentially the fee a bank charges you to borrow money, expressed as a percentage. Typically, a buyer with a high , high down payment, and low debt-to-income ratio will secure a lower interest rate the risk of loaning that person money is lower than it would be for someone with a less stable financial situation.

Lenders provide an annual interest rate for mortgages. If you want to do the monthly mortgage payment calculation by hand, you’ll need the monthly interest rate just divide the annual interest rate by 12 . For example, if the annual interest rate is 4%, the monthly interest rate would be 0.33% .

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Calculate Your Monthly Payment

Use our free mortgage payment calculator to find out how much you’ll pay each month:

Mortgage Calculator

If you want to do the math by hand, you can calculate your monthly mortgage payment, not including taxes and insurance, using the following equation:

M = P /

P = principal loan amount

i = monthly interest rate

n = number of months required to repay the loan

Once you calculate M , you can add in the monthly property tax and homeowners insurance premium, if you have them. These are fixed costs that aren’t determined by how much you borrow from the bank, so they can easily be added to the monthly cost.