How do mortgage lenders calculate monthly payments?

For most mortgages, lenders calculate your principal and interest payment using a standard mathematical formula and the terms and requirements for your loan.

Fixed-rate mortgage

A typical fixed-rate mortgage is calculated so that if you keep the loan for the full loan term – for example, 30 years – and make all of your payments, you will precisely pay off the loan at the end of the loan term. Learn more about how this works.  

The payment depends on the loan amount, the loan term, and the interest rate.  You can use our calculator to calculate the monthly principal and interest payment for different scenarios.

Balloon loan

A balloon loan has a much shorter loan term than a regular mortgage – typically only five years – but the monthly payments are calculated as if the loan was going to last for a much longer time, typically 30 years.  Because the monthly payments aren’t high enough to pay off the full loan, the remaining loan balance is due as one large final payment (known as the “balloon” payment) at the end of the loan term.  

So, for example, if you had a mortgage loan of $100,000 for 30 years at an interest rate of four percent, your monthly principal and interest payment would be $477 per month.  With a regular 30-year loan you would make this payment for 30 years.  With a five-year balloon loan you would make this payment for five years and then owe the balance of the loan – or $90,448 – at the end of the fifth year.

Adjustable-rate mortgage (ARM)

If you have an adjustable-rate loan, your initial payments are calculated assuming that your initial interest rate remains the same for the entire loan term. When your interest rate adjusts, your payment will typically (though not always) be re-calculated based on the new interest rate and the remaining loan term.