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Understanding Loan Payments
Loan payments are calculated using the amortization formula, which divides your loan into equal monthly payments that cover both principal and interest. Early payments are mostly interest; later payments are mostly principal.
How Interest Rates Impact Your Payment
On a $250,000 mortgage: at 5% the payment is $1,342/month ($233,139 total interest). At 7% it jumps to $1,663/month ($348,772 total interest). That 2% difference costs an extra $115,633 over the life of the loan.
15-Year vs 30-Year Mortgages
A 15-year loan has higher monthly payments but dramatically less total interest. On $250,000 at 6.5%: 30-year = $1,580/month ($318,861 interest). 15-year = $2,177/month ($141,928 interest). You save $176,933 with the shorter term.
Frequently Asked Questions
What's a good mortgage interest rate?
Rates vary by market conditions. As a general guideline, compare your rate to the current national average. Even 0.25% lower can save thousands over the loan's life.
Should I make extra payments?
Extra payments go directly to principal, saving significant interest. An extra $100/month on a $250K mortgage at 6.5% saves ~$65,000 in interest and pays off 5 years early.
What is PMI?
Private Mortgage Insurance is required when your down payment is less than 20%. It typically costs 0.5-1% of the loan annually. It's removed once you reach 20% equity.
How much house can I afford?
A common guideline: monthly housing costs (mortgage + insurance + taxes) should be under 28% of gross monthly income. Total debt payments should stay under 36%.
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