How To Calculate Your Mortgage Payment | Summary and Q&A

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August 25, 2022
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The Organic Chemistry Tutor
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How To Calculate Your Mortgage Payment

TL;DR

This lesson explains how to calculate monthly mortgage payments using a formula based on the principal, interest rate, number of payments, and loan term.

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Questions & Answers

Q: How do you calculate the monthly payment for a mortgage?

To calculate the monthly mortgage payment, you need the principal, annual interest rate, number of payments per year, and loan term. Use the formula provided in the content to determine the monthly payment.

Q: What is the purpose of converting the annual interest rate to a decimal?

Converting the annual interest rate to a decimal is necessary for accurate calculations. In this case, 5% is converted to 0.05 to correctly apply it in the formula.

Q: How does the number of payments affect the monthly mortgage payment?

The number of payments per year affects the monthly mortgage payment by determining how many times the interest is applied. In this example, with monthly payments (12 per year), the total interest is spread across those 12 payments.

Q: Why is the loan term important in calculating the monthly payment?

The loan term, in this case, 30 years, is crucial in calculating the monthly payment because it determines the total number of payments made over the loan's duration, affecting the interest applied.

Summary & Key Takeaways

  • To calculate the monthly mortgage payment, you need the loan's principal (in this case, $400,000), the annual interest rate (5%), the number of payments per year (12), and the loan term (30 years).

  • The formula for calculating the monthly payment is Principal * (Annual Interest Rate / Number of Payments) / (1 - (1 + (Interest Rate / Number of Payments)) ^ (-1 * (Number of Payments * Loan Term))).

  • Plugging in the values, the monthly payment for a $400,000, 30-year loan with a 5% interest rate and 12 monthly payments is $2,147.29.

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