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One of the big questions to ask when buying a house is how much will my mortgage payments be? When looking to refinance or make a purchase of a new property, it is important to be able to calculate mortgage payments based on the current rate environment. When refinancing a home, both the current payment and the proposed payment need to be determined so that an accurate comparison can be made. When purchasing a new home, calculating a payment is important to determine whether the purchaser can afford the payment. Calculating mortgage payments is a simple process with a basic spreadsheet program, but more difficult without one.

The Variables of a Mortgage Payment Calculation

Three variables required to calculate a mortgage payment are the interest rate, loan amount, and amortization term. The first two variables are obvious, but the loan amortization term can be a bit more confusing.

The loan amortization term refers to the period of time required to pay the loan in full. The typical 30-year mortgage has a 30-year term, but also a 30-year amortization term. At the end of 30 years, the mortgage is paid in full based on the payment schedule. It is possible for the term of the mortgage to be shorter than the amortization term. A balloon mortgage occurs when a payment larger than the normal scheduled payment is required to pay the loan in full at maturity.

Calculating a Mortgage Payment with a Spreadsheet Program

All modern spreadsheet programs contain a payment function. Microsoft Works requires the principal amount, the rate, and the term. Microsoft Excel requires the rate, the number of periods, and the present value. These are all the same variables that are being required. It is important to note that the rate will need to be adjusted based on the period of time being measured. For example, on a 30-year mortgage where payments are made monthly, you will have to divide the interest rate by 12 to determine the monthly rate. A similar adjustment needs to be made to the term or number of periods. On a 30-year mortgage, payments are made monthly, so the number of periods is equal to 360.

Assuming a 30-year, fully-amortizing mortgage, a 6.00% rate, and a $200,000 loan amount, the monthly payment would be $1,199.10. The 6.00% rate needs to be divided by 12 in the function, resulting in a monthly rate of 0.50%. The number of periods or term is 360 months.

Calculating a Mortgage Payment with a Basic Calculator

Calculating a mortgage payment without a spreadsheet or financial calculator requires a bit more math. The formula is as follows:

Payment = Principal x [rate x (1 + rate) ^n / (1 + rate) ^n -1]

The “^” indicates an exponent, and “n” represents the number of periods or amortization term. Starting with the fraction within the brackets, a 6.00% annual rate needs to be converted to a monthly rate, which would be 0.50%. The numerator is determined by multiplying 0.50% times 1 plus the 0.50% rate to the power of 360, which is 0.0301. For the denominator, 1 plus the 0.50% rate raised to the power of 360 minus the whole number 1 is 5.0226. Dividing 0.0301 by 5.0226 is 0.005996. Multiplying this result times the principal amount of $200,000 from the example above equals $1,199.10. This is the same result achieved in the spreadsheet example above.

A basic spreadsheet program is the easier route to take. To perform the calculations using the formula above requires a calculator that can handle exponents.

Other Considerations

Many mortgage lenders also require that taxes and insurance be escrowed. This does not affect the monthly principal and interest payment, but it would affect the total monthly payment to the mortgage company. Many times, a mortgage company will require 13 months of tax and insurance payments to provide a buffer against rising taxes and insurance costs. This would be calculated by adding the annual tax payment required plus the annual property insurance payment, dividing by 12 and then multiplying by 13. A mortgage representative should be able to indicate what amounts will be required on an ongoing basis.

Most persons searching for a new house want to get the best possible mortgage interest. Obtaining a home loan is a big commitment, so persons try to receive the cheapest rate on your overall mortgage payment and ease the pressure of having to find so much money on a monthly basis. There are various entities that provide low rates on mortgage interest. There are various sources you can access to obtain the best possible mortgage interest.

The federal Housing Administration offers some of the lowest interest rates on a home mortgage loan. The first step entails finding out if you are qualified for a FHA home loan. Persons choose this mortgage company because it is generally easier for persons to qualify for a loan through this company. A low interest rate can greatly lessen the monthly deposits for the duration of the mortgage. The loan also provides one of the lowest downpayment requiring persons to pay 3% downpayment.

The internet provides some of the best mortgage interest rates. There are multiple mortgage rate search tools such as bankrate.com and lendingtree.com. bankrate.com maintains the most up to date lenders and rates based on your search criteria. After getting a record of all the mortgagers you can then call each to get more details. Lendingtree.com ask that you to fill out information once and lenders will call you with their best rates. Signing up with a Credit Union can provide a good option for getting low interest mortgages. Credit unions more often offer competitive rates when compared to the open market.

New home buyers should try and maintain a good credit score to recive the best mortgage interest rate. Most approvals on loans are offered done based on how high your credit score is, so you should attempt to enhance your credit score. Individuals with a lower credit score, minimize their chances of getting a lower mortgage interest rate.

Always check around for all the possible options available to you, the only way to get the best mortgage interest is to research all your local banks and investment organizations you increase your opportunity of getting the best available rates. Potential home owners can also buy additional points on a loan in order to secure a lower mortgage interest rate. Once you have found a loaner, make an inquiry about getting extra points to reduce the interest rate. These usually attract additional fees, so make sure you are properly informed about all the clauses before to making a final decision. If done correctly, this could ultimately benefit you in the long run.

You can contact your mortgage lender directly so you can talk to them face to face, so you can get a feel for how you’ll be treated. Taking out a mortgage plan for a smaller time frame, like say 15 years, this will more likely guarantee you a lower rate of interest from your lender. The only disadvantage is that, in this instance your monthly payments will be made bigger even though it will be paid off in a shorter of time.