CALCULATING YOUR MONTHLY PAYMENT

When we are buying a house, most of us focus on how much the monthly mortgage payment will be. It is important to understand how the monthly payment is calculated.

You start with the principal amount of the loan. This is the purchase price of the house, minus whatever down payment you have made. This is the amount of money, which you have borrowed.

You then look at the time period over which the loan will be repaid. This is called the loan amortization period. Most home loan mortgages are paid back over a thirty year period. They can also be paid back over fifteen years or ten years. If other things are equal, a longer loan period will result in a smaller monthly payment. Of course, if other things are equal, a longer loan period will result in you paying far more interest on the loan, over the life of the loan. From a long-term perspective, a shorter amortization period – if you can afford the monthly payments – always results in you paying much less money over the life of the deal.

Finally, you look at the interest rate. This is the price that you pay for renting the money from the bank or other lender. Interest rates go up and down a good deal. On a national level, they depend upon the overall state of the economy and the policies of the Federal Reserve Board. The particular rate that you get depends upon how good your credit is, and what kind of deal you get from your lender. It is very much worth your time to shop around to get the lowest possible interest rate.

The monthly payment is calculated, so that you pay the same amount every month, for the life of the loan, and, at the end of the loan, you will have paid back all of the principal and all of the interest. To calculate your actual payment, go a mortgage interest calculator, such as www.bankrate.com, and plug in the principal amount of the loan, the amortization period and the interest rate.

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