How to Calculate Interest Rate on a Loan with Example

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Mortgage Details

$
$
%
Years
$
$
Total Monthly Payment
Principal & Interest:
Property Tax (Mo):
Home Insurance (Mo):
Total Interest Paid
Over Loan Term
Total Cost of Loan

Understanding Your Mortgage Repayment

Buying a home is likely the largest financial commitment you will make in your lifetime. Understanding how your mortgage repayment is calculated is crucial for long-term financial planning. This Mortgage Repayment Calculator breaks down your monthly obligations, separating the principal and interest from other recurring costs like property taxes and homeowners insurance.

How the Mortgage Formula Works

Your monthly principal and interest payment is determined by three main factors: the loan amount (home price minus down payment), the interest rate, and the loan term (duration). The formula used by lenders is:

M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1 ]

  • M: Total monthly payment
  • P: Principal loan amount
  • i: Monthly interest rate (annual rate divided by 12)
  • n: Number of payments (loan term in years multiplied by 12)

The Impact of Interest Rates

Even a small difference in your interest rate can have a massive impact on the total cost of your home. For example, on a $300,000 loan over 30 years, the difference between a 6% and a 7% interest rate is roughly $200 per month, but over the life of the loan, it amounts to over $70,000 in extra interest payments.

Why Your Monthly Payment is Higher Than the Mortgage

Many first-time homebuyers are surprised when their actual monthly bill is higher than the quoted mortgage payment. This is because lenders often collect escrow payments for:

  • Property Taxes: Local government taxes based on the assessed value of your home.
  • Homeowners Insurance: Policy costs to protect your property against damage.
  • PMI (Private Mortgage Insurance): If your down payment is less than 20%, you may also pay PMI, which protects the lender if you default.

Example Calculation

Let's look at a realistic scenario using this calculator:

  • Home Price: $350,000
  • Down Payment: $70,000 (20%)
  • Loan Amount: $280,000
  • Interest Rate: 6.5%
  • Term: 30 Years

In this scenario, your Principal and Interest payment would be approximately $1,770. However, if you add annual property taxes of $4,200 ($350/mo) and insurance of $1,200 ($100/mo), your actual check written to the bank would be $2,220 per month.

Frequently Asked Questions

Should I choose a 15-year or 30-year term?
A 15-year term will have higher monthly payments but a significantly lower interest rate and total interest cost. A 30-year term offers lower monthly payments, giving you more cash flow flexibility, but you will pay much more in interest over time.

How can I lower my monthly payment?
You can lower your payment by increasing your down payment, securing a lower interest rate (by improving your credit score), removing PMI once you have 20% equity, or choosing a less expensive home.

function calculateMortgage() { // 1. Get Input Values var homePrice = parseFloat(document.getElementById('homePrice').value); var downPayment = parseFloat(document.getElementById('downPayment').value); var interestRate = parseFloat(document.getElementById('interestRate').value); var loanTerm = parseFloat(document.getElementById('loanTerm').value); var propertyTax = parseFloat(document.getElementById('propertyTax').value); var homeInsurance = parseFloat(document.getElementById('homeInsurance').value); // 2. Validation if (isNaN(homePrice) || isNaN(downPayment) || isNaN(interestRate) || isNaN(loanTerm) || isNaN(propertyTax) || isNaN(homeInsurance)) { alert("Please enter valid numbers in all fields."); return; } if (downPayment >= homePrice) { alert("Down payment cannot be greater than or equal to the home price."); return; } // 3. Calculation Logic var principal = homePrice – downPayment; var monthlyInterestRate = (interestRate / 100) / 12; var numberOfPayments = loanTerm * 12; // Mortgage Formula: M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1 ] var x = Math.pow(1 + monthlyInterestRate, numberOfPayments); var monthlyPI = (principal * x * monthlyInterestRate) / (x – 1); // Calculate Monthly Tax and Insurance var monthlyTax = propertyTax / 12; var monthlyInsurance = homeInsurance / 12; // Total Monthly Payment var totalMonthly = monthlyPI + monthlyTax + monthlyInsurance; // Total Loan Cost metrics var totalPrincipalAndInterest = monthlyPI * numberOfPayments; var totalInterestOnly = totalPrincipalAndInterest – principal; var totalCostOfLoan = totalPrincipalAndInterest + downPayment; // Note: Total Cost usually implies P+I+Down, excluding tax/ins over time as those are variable // 4. Formatting Currency var formatter = new Intl.NumberFormat('en-US', { style: 'currency', currency: 'USD', minimumFractionDigits: 0, maximumFractionDigits: 0, }); // 5. Display Results document.getElementById('resultTotalMonthly').innerHTML = formatter.format(totalMonthly); document.getElementById('resultPI').innerHTML = formatter.format(monthlyPI); document.getElementById('resultTax').innerHTML = formatter.format(monthlyTax); document.getElementById('resultInsurance').innerHTML = formatter.format(monthlyInsurance); document.getElementById('resultTotalInterest').innerHTML = formatter.format(totalInterestOnly); document.getElementById('resultTotalCost').innerHTML = formatter.format(totalCostOfLoan); } // Run calculation on load with default values window.onload = function() { calculateMortgage(); };

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