How a fixed loan payment is calculated
See the standard amortization formula, and what a monthly estimate still leaves out of a lender’s quote.
Short answer
A fixed payment covers one month of interest on the remaining balance and enough principal that the balance hits zero on the last month.
Interest this month, principal every month
Convert the annual rate to a monthly rate by dividing by 12. Early payments are mostly interest because the balance is large. Later payments are mostly principal because the balance is small. The payment itself stays flat. That is what the formula solves for.
A zero rate is ordinary division: amount divided by the number of months. Fees, mortgage insurance, taxes, and the gap between a note rate and an APR are outside the formula. Use the result to understand an offer, not to replace one. The Consumer Financial Protection Bureau is the place to learn how a real disclosure is supposed to read.
Common mistakes
- Dividing the annual rate by 365 and also by 12.
- Calling the estimate a monthly housing budget when taxes and insurance are missing.
Frequently asked questions
- Why did my quote differ?
- The quote can include costs this formula never sees, or a different term than the years you typed.