As a follow up to my post on Tuesday which was about the difference between fixed and adjustable interest rates, I think it is important to cover how we calculate monthly mortgage payments. This will really show what the difference between an adjustable rate and fixed rate mortgage payment will be, while also helping to give you some clarity around what kind of mortgage payments you are looking at based upon your new home’s cost.

Now, you can simply go to an online mortgage calculator to determine the payment and plug in the cost of the home, the down payment, and the interest rate, and you will see what the amortized payment will look like. Similarly, you can use an interest only calculator to do the same. But if you want to understand the math behind it, here is the formula for a fixed rate mortgage:

M=P[i(1+i)^n]/[(1+i)^n-1]

In this formula, M is the mortgage payment, P is the principal balance, i is the interest rate, and n is the number of monthly payments. So, a 30 year mortgage for $100,000 at 4% would look like this: M = 100,000[.34(1+.04]^360]/[(1+.04)^360-1].

For adjustable rate mortgages with an interest only payment, you can again use an online calculator, or simply divide the interest rate into the principal and divide by 12. So the formula would be:

M=(P*i)/12

In this formula, M is the mortgage payment, P is the principal balance, and i is the interest rate. So, an interest only adjustable rate mortgage for $100,000 at 4% would look like this: M=(100,000*.04)/12.

More practically, what this shows you is that if the interest rate is the same, the payment will always be lower on an adjustable rate interest only mortgage. But since there is no guarantee for the interest rate of the adjustable rate mortgage, it can always go up.

If you have any questions about what your monthly mortgage payment will be, please contact me. If you have anything to add about calculating mortgage payments, please leave a comment.