Loan Payment Calculator

Loan payments are calculated using an amortization formula that ensures each monthly payment covers both the interest owed for that period and a portion of the principal balance. The formula is M = P[r(1+r)^n] / [(1+r)^n - 1], where P is the principal, r is the monthly interest rate, and n is the number of payments.

In the early years of a loan, a larger portion of each payment goes toward interest. As the principal decreases over time, more of each payment is applied to the principal. This is why making extra payments early in a loan term can save significant amounts of interest.

Three main factors determine the size of your monthly loan payment:

• Loan Amount (Principal): The total amount you borrow. A larger principal means higher monthly payments.
• Interest Rate: The annual percentage rate charged by the lender. Even a small change in interest rate can significantly affect your total cost. For example, on a $250,000 30-year mortgage, the difference between 6% and 7% adds about $166 per month and over $59,000 in total interest.
• Loan Term: The length of the repayment period. Longer terms mean lower monthly payments but more total interest paid. A 15-year mortgage has higher monthly payments than a 30-year mortgage but costs far less in total interest.

There are several strategies to minimize the total cost of borrowing:

• Make extra payments: Even small additional payments toward the principal each month can shave years off your loan and save thousands in interest.
• Choose a shorter term: If you can afford higher monthly payments, a shorter loan term dramatically reduces total interest paid.
• Refinance when rates drop: If interest rates fall significantly below your current rate, refinancing can lower your monthly payment or total interest.
• Improve your credit score: A higher credit score qualifies you for lower interest rates, which directly reduces your monthly payment and total cost.

Fixed-rate loans keep the same interest rate throughout the entire loan term, giving you predictable monthly payments. This calculator assumes a fixed rate. Adjustable-rate mortgages (ARMs) start with a lower introductory rate that later adjusts periodically based on market conditions, which can cause payments to increase or decrease over time.

Fixed-rate loans are generally recommended for borrowers who plan to stay in their home long-term and prefer payment stability. ARMs may benefit borrowers who plan to sell or refinance within the initial fixed-rate period.