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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. This is the standard formula used for fixed-rate mortgages and installment loans.
The calculator uses the standard amortization formula:
Where:
Explanation: The formula accounts for the time value of money, calculating equal payments that cover both interest and principal over the loan term.
Details: Understanding your monthly payment helps with budgeting and determining how much house you can afford. It also shows the true cost of borrowing through total interest paid.
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.
Q1: Does this include property taxes and insurance?
A: No, this calculates only principal and interest. A complete mortgage payment may also include taxes, insurance, and possibly PMI.
Q2: How does a larger down payment affect payments?
A: A larger down payment reduces the principal (P), which directly lowers your monthly payment and total interest.
Q3: What's the difference between 15-year and 30-year mortgages?
A: A 15-year mortgage has higher monthly payments but much less total interest. A 30-year mortgage has lower payments but more total interest.
Q4: How does interest rate affect payments?
A: Higher rates increase both monthly payments and total interest. Even small rate differences can have large impacts over time.
Q5: Can I use this for other types of loans?
A: Yes, this works for any fixed-rate installment loan (car loans, personal loans, etc.), though some loans may have fees not accounted for here.