The Mathematics Behind Mortgage Calculations

Understanding Mortgage Mathematics

When you're buying a home, understanding how mortgage payments are calculated can help you make informed decisions about your loan terms and budget.

The Monthly Payment Formula

The standard mortgage payment formula is: M = P[r(1+r)^n]/[(1+r)^n-1]

• M = Monthly payment
• P = Principal loan amount
• r = Monthly interest rate (annual rate ÷ 12)
• n = Total number of payments (years × 12)

Amortization: How Payments Break Down

Each mortgage payment consists of two parts:

• Principal: The amount that goes toward paying down the loan balance
• Interest: The cost of borrowing the money

The Impact of Interest Rates

Even small changes in interest rates can significantly affect your monthly payment and total interest paid over the life of the loan.

Strategies to Save on Your Mortgage

• Make extra principal payments
• Consider bi-weekly payments
• Shop around for the best rates
• Consider a shorter loan term
• Improve your credit score before applying