Understanding the Loan Formula
This calculator uses the standard amortization formula to determine your monthly payment. This formula considers the principal amount, the annual interest rate, and the total number of months in the loan term.
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1 ]
- M: Total monthly payment
- P: Principal loan amount (the money you borrowed)
- i: Monthly interest rate (Annual Rate / 12 / 100)
- n: Number of payments over the loan's lifetime (Years × 12)
Frequently Asked Questions
What is the difference between Interest Rate and APR?
The interest rate is the cost of borrowing the principal loan amount. The APR (Annual Percentage Rate) is a broader measure that includes the interest rate plus other costs associated with the loan, such as broker fees, closing costs, and discount points. The APR is usually higher than the interest rate and provides a more accurate picture of the total cost of the loan.
How can I lower my monthly payment?
There are three primary ways to reduce your monthly loan payment:
- Increase the Loan Term: Spreading the loan over a longer period (e.g., 30 years instead of 15) reduces the monthly payment, but increases the total interest paid over the life of the loan.
- Make a Larger Down Payment: Borrowing less money means a lower principal balance, which results in lower monthly payments and less total interest.
- Shop for a Lower Interest Rate: Improving your credit score or comparing lenders can help you secure a lower rate, directly lowering your monthly obligation.
Should I choose a 15-year or 30-year mortgage?
It depends on your financial goals. A 15-year mortgage typically has a lower interest rate and allows you to build equity faster, but the monthly payments are significantly higher. A 30-year mortgage offers lower monthly payments, providing more flexibility in your monthly budget, but you will pay substantially more interest over the life of the loan.