How is a Mortgage Payment Calculated?

A mortgage payment is what you will pay in total to service, or pay off, the loan. It primarily consists of both principal and interest payments, but may include closing costs or mortgage insurance rolled into the loan as well.

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How the mortgage payment is calculated depends on:

  • Type of loan: Different types of loans may treat interest and principal differently. For example, an amortized loan will have the same mortgage payment amount throughout the term of the loan, yet a Jumbo loan will consist of initially small mortgage payments that largely cater for interest and a large payment for the principle at the end of the loan term.

  • What rate is applied: Is the loan a fixed rate, an adjustable-rate mortgage (ARM), or a combination of the two? This affects what you can expect to pay initially and in the future. A fixed rate mortgage is straightforward and the mortgage payment rarely changes, but a mortgage which is wholly or partly an ARM will have changes in mortgage payments in periods throughout the term.

  • Refinancing: Refinancing a loan can result in a change of interest rate, loan type or loan term. All of these will affect how your mortgage payment will be calculated.

  • Your financial standing: Your down payment, savings record, credit record, employment history, income level and credit score all have a bearing on how your mortgage payment will be calculated. Even on the same loan type and amount two borrowers can get differing offers. The stronger your financial position the better your terms than the next person.