How do lenders calculate monthly mortgage payments?
Short answer
For most mortgages, lenders calculate the principal-and-interest payment from the loan amount, term, and interest rate using a standard formula. The total amount you send each month is often higher because it can include taxes, insurance, and other escrow items. Adjustable-rate and balloon loans are calculated differently.
Full explanation
The CFPB says that for most mortgages, lenders calculate the -and- payment with a standard mathematical formula and the terms of the loan. On a typical fixed-rate, fully amortizing mortgage, that payment is set so that if you keep the loan for the full term and make every payment, the loan is paid off at the end. The payment depends on the loan amount, the term, and the interest rate.
The total monthly amount sent to the mortgage company is often higher than principal and interest alone. Fannie Mae says that amount usually includes principal, interest, and any escrowed property taxes and insurance. If an escrow account is set up, part of the payment is held and used to pay those bills. Homeowners-association or condo dues are generally a separate housing expense unless a particular arrangement collects them through escrow.
A balloon loan often has payments calculated as if the term were much longer, with a large remaining balance due at the end. On an adjustable-rate mortgage, initial payments are calculated as if the starting rate lasted the full term; when the rate adjusts, the payment is typically recalculated using the new rate and the remaining term. Look at both the principal-and-interest figure and the total amount due when you compare offers.