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How to Manually Calculate a Mortgage

how to calculate a mortgage

Your mortgage payment depends on several factors, such as your loan amount.

Large New Ohio Home image by Shannon Workman from

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A mortgage is a long-term commitment that can take up a significant part of your monthly budget. You can manually calculate your monthly payment to figure how much you will owe each month. A typical fixed-rate mortgage requires equal monthly payments for the life of the loan. The lender applies a portion of the payment to the principal balance and a portion toward interest in a process called amortization. If you make all of your monthly payments on time, you will gradually pay off your loan by the end of the loan term.

Step 1

Multiply your home’s purchase price or estimated value by the percentage of the value you will finance with a mortgage. For example, assume you will finance 80 percent of a $937,500 home with a mortgage. Multiply $937,500 by 80 percent, or 0.8, to get a $750,000 loan amount.

Step 2

Divide the mortgage’s annual interest rate by 12 to convert it to a monthly rate. In this example, assume your annual interest rate is 6 percent. Divide 6 percent, or 0.06, by 12 to get a 0.005 monthly rate.

Step 3

Multiply the number of years of the mortgage by 12 to determine the total

number of monthly payments. In this example, assume you will get a 30-year loan. Multiply 30 by 12 to get 360 monthly payments.

Step 4

Plug the numbers into the following formula: [R/(((1 + R)^M) - 1)] x [(1 + R)^M] x L. In the formula, R represents the monthly interest rate, M represents the number of monthly payments and L represents the loan amount. The formula in this example would be [0.005/(((1 + 0.005)^360) - 1)] x [(1 + 0.005)^360] x $750,000.

Step 5

Add the monthly interest rate to 1 and raise the result to the power of the number of monthly payments in the first and second parts of the formula. In this example, add 0.005 to 1 to get 1.005. Raise 1.005 to the power of 360 to get 6.02258. This leaves [0.005/(6.02258 - 1)] x 6.02258 x $750,000.

Calculate the denominator in the first part of the formula. Divide the numerator by your result. In this example, subtract 1 from 6.02258 to get 5.02258. Divide 0.005 by 5.02258 to get 0.0009955. This leaves 0.0009955 x 6.02258 x $750,000.

Multiply the remaining numbers to determine your monthly payment. Concluding the example, multiply 0.0009955 by 6.02258 by $750,000 to get a payment of approximately $4,497 per month. If you make this $4,497 payment every month, you will pay off the loan in 30 years.

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