1. What is the Loan Payment Formula?

The loan payment formula calculates the fixed monthly payment required to fully repay a loan over its term, including both principal and interest components. This is known as the PMT (payment) formula in finance.

2. How Does the Calculator Work?

The calculator uses the standard loan payment formula:

Where:

• \( PMT \) — Monthly payment amount
• \( P \) — Principal loan amount
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( n \) — Total number of payments (term in years × 12)

Explanation: The formula accounts for compound interest over the life of the loan, ensuring each payment covers both interest and principal reduction.

3. Understanding Interest and Principal

Details: Early payments consist mostly of interest, while later payments apply more to principal. The calculator shows the total interest paid over the loan term.

4. Using the Calculator

Tips: Enter the loan amount in dollars, annual interest rate as a percentage (e.g., 3.5 for 3.5%), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: How does a higher interest rate affect payments?
A: Higher rates increase both monthly payments and total interest paid. A 1% rate increase can significantly impact long-term costs.

Q2: What's the benefit of a shorter loan term?
A: Shorter terms mean higher monthly payments but less total interest paid and faster equity buildup.

Q3: How does extra principal payment affect the loan?
A: Extra payments reduce total interest and can shorten the loan term, as they directly reduce the principal balance.

Q4: Are property taxes and insurance included?
A: No, this calculates principal and interest only. Actual mortgage payments may include escrow for taxes and insurance.

Q5: How accurate is this calculator?
A: It provides standard amortization calculations. Actual loan terms may vary based on lender fees and specific program requirements.