A mortgage is a loan secured by real estate. Understanding how payments are calculated helps borrowers make informed decisions about loan terms, down payments, and refinancing.
Principal and Interest
Each mortgage payment includes principal (reducing loan balance) and interest (cost of borrowing). Early payments are mostly interest; later payments are mostly principal. This is called amortization.
The Amortization Formula
Monthly payment = P * [r(1+r)^n] / [(1+r)^n - 1], where P = principal, r = monthly interest rate, n = number of payments. Our API handles this calculation along with tax and insurance escrow.
Total Cost of a Mortgage
Total cost includes all monthly payments over the loan term. On a 30-year loan, you may pay 1.5-2x the original loan amount when including interest. Shorter terms have higher payments but less total interest.
Escrow and Additional Costs
Many mortgages include escrow for property tax and insurance. These are paid monthly to the lender, who pays annual bills on your behalf. HOA fees may also be included in your total housing payment.