How To Calculate Your Interest Payment on a Home Loan

Buying a house and taking out a home loan is an enormous commitment.  When you sign on the dotted line, you are usually agreeing to make interest payments on your house for up to thirty years.  To ensure that you are being responsible, you should take some time and think about your finances over that period of time.  Do you plan on retiring?  Do you plan on going back to school?

A good way to start drawing your financial picture is to determine just how much your house payments would be if you made the purchase.  The formula is a little complicated, but if you're algebra-adverse, there are many sites online that have automatic mortgage calculators.

Even if you are doing the calculation yourself, it is smart to double check your work against a few different online mortgage calculators to be sure you are doing it right.  But if you are setting up a budget spreadsheet, here is the math that you can use to determine your payments:

First, find out what your annual interest rate on your mortgage would be.  You can typically find this rate by checking your bank's website or even by getting pre-approved for a home loan.  It is also smart to shop around for rates.  Just like any purchase, doing a little shopping around could save you a lot of money down the road.

Next plug your interest rate into this formula:

Monthly Mortgage Payment = [Total Amount Borrowed} * [(monthly interest rate)*(1 + monthly interest rate) ^ (total number of payments)] / [(1 + monthly interest rate)^total number of payments – 1]

Let's try that with real numbers….

If you have a $100,000, 30-year mortgage with a 5% interest rate, your calculation would look like this:

100,000 * [(.00416*(1.00416)^360)/((1.00416)^360)-1)]

The "carrot" symbol represents the "to the power of" operation.  If you are using your Windows calculator, you can do this by setting your calculator to "scientific" mode and using the x^y key.  To enter the calculation that you see below, you would enter [1.0416], [x^y], [360] then the "enter" key.

This would leave you with a monthly mortgage payment of about $536 a month.  This is the amount of money that you would owe to the bank each year for 30 years before you owned your home.

It is also important to consider other monthly obligations that may raise the cost of owning your home.  Many homes are subject to homeowner's association fees and property taxes.  These fees often go up over time.  So when you are planning your purchase, be sure to take these fees into account so that you don't get caught off guard.