How Does a Mortgage Work?

Mortgages are designed to make purchasing property more affordable by spreading the cost over an extended period. The lender charges interest on the loan amount, and borrowers repay both the principal and interest over the term of the loan.

Mortgages typically have fixed or variable interest rates, meaning the payment amount might stay the same throughout the loan term (fixed rate) or change periodically (variable rate).

Mortgage Payment Formula

The mortgage payment formula is used to calculate your monthly mortgage payment. It takes into account the loan amount, interest rate, and loan term.

M = P × (r × (1 + r)^n) / ((1 + r)^n - 1)

Where:

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

Why Is the Mortgage Interest Rate Important?

Your mortgage interest rate is a critical factor that determines the total amount you will pay over the life of your loan. A higher interest rate leads to higher monthly payments and a higher overall cost. Conversely, a lower rate can save you money over time.

When shopping for a mortgage, comparing interest rates from different lenders can help you secure the best deal. A small difference in interest rates can make a big impact on the total amount you repay.

How to Use a Mortgage Calculator

A mortgage calculator helps you estimate your monthly mortgage payments. You simply input the loan amount, interest rate, and loan term. The calculator then uses the mortgage formula to give you an estimate of what you will pay each month.

While this estimate is useful, remember that your actual payment might vary depending on other factors such as property taxes, homeowner's insurance, and private mortgage insurance (PMI). Always consult with a lender for an accurate quote.