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Loan Payment Formula:
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The loan payment formula calculates the fixed monthly payment required to fully amortize a loan over its term, including both principal and interest components. It accounts for the time value of money and is standard in mortgage and loan calculations.
The calculator uses the standard loan payment formula:
Where:
Explanation: The formula calculates the fixed payment needed to pay off the loan over its term, with each payment covering both interest and principal.
Details: Accurate payment calculation is crucial for budgeting, loan comparison, and understanding the full cost of borrowing. It helps borrowers evaluate affordability and lenders assess risk.
Tips: Enter the total loan amount (including any origination fees), the annual interest rate, and the loan term in years. All values must be positive numbers.
Q1: What's included in the principal amount?
A: The principal should include the base loan amount plus any origination fees or points that are being financed.
Q2: How does the interest rate affect payments?
A: Higher rates increase monthly payments significantly. A 1% rate increase can raise payments by 5-10% depending on the term.
Q3: Why are payments higher at the beginning of the loan?
A: Early payments are mostly interest due to the amortization schedule. The principal portion increases with each payment.
Q4: How do loan terms affect payments?
A: Shorter terms mean higher monthly payments but less total interest paid. Longer terms reduce monthly payments but increase total interest costs.
Q5: Does this include taxes and insurance?
A: No, this calculates only principal and interest. Actual mortgage payments may include escrow for property taxes and insurance.