How is a loan payment calculated?
For a fixed-rate amortizing loan, the monthly payment (excluding insurance) stays the same for the whole term. It is given by M = P × r / (1 − (1 + r)−n), where P is the amount borrowed, r the monthly rate (annual rate ÷ 12) and n the number of payments.
Mortgage insurance or PMI, when it applies, is added on top. Here it is calculated on the original loan amount.
Reading the amortization schedule
Every payment contains some interest and some principal. Early on, the balance is high, so most of each payment goes to interest. Over time the interest share shrinks and the principal is paid down faster. The chart shows that shift year by year.
That is why extra payments save the most interest when they are made early in the life of the loan.
The true cost of a loan
The total cost adds up interest, insurance and upfront fees such as origination fees or closing costs. It is a fairer way to compare offers than the interest rate alone; lenders usually also quote an APR that includes most fees.
Debt-to-income ratio
Lenders look at how much of your gross monthly income goes to debt payments. Many prefer a debt-to-income ratio of 36% or less, although rules vary by country and lender. Enter your income to check where you stand.
FAQ
What is the difference between the interest rate and the APR?
The interest rate is used to calculate interest. The APR (annual percentage rate) also includes most mandatory fees, which makes it the better figure for comparing two loan offers.
Is a 15-year or a 30-year mortgage better?
A longer term lowers the monthly payment but greatly increases total interest. Compare both terms in the calculator to see the difference.
Does making extra payments help?
Yes. Extra payments reduce the principal, so less interest builds up afterwards. The earlier you make them, the more you save.
Is this a loan offer?
No. This is an estimate. Only a written offer from a lender is binding.