Q1: How is the monthly loan payment calculated?
The monthly payment is calculated using the amortization formula: P = [r × PV] / [1 - (1 + r)^(-n)], where P is the payment, r is the monthly interest rate, PV is the loan principal, and n is the number of payments. This formula accounts for both principal and interest.
Q2: What factors affect my monthly loan payment?
Three main factors affect your monthly payment: the loan amount (higher amount = higher payment), the interest rate (higher rate = higher payment), and the loan term (longer term = lower payment but more total interest paid over time).
Q3: Should I choose a shorter or longer loan term?
A shorter term means higher monthly payments but less total interest paid. A longer term means lower monthly payments but more total interest. Choose based on your monthly budget capacity and your goal to minimize total interest cost.
Q4: Can I reduce my monthly payment after taking a loan?
You can reduce monthly payments by refinancing to a lower interest rate or extending the loan term. However, extending the term increases total interest paid. Some lenders also allow payment modifications, but terms vary.
Q5: How does the interest rate impact my payment?
Even a small difference in interest rate can significantly impact your monthly payment. For example, on a $200,000 loan over 30 years, a 1% rate difference can change your monthly payment by over $100. Always shop around for the best rates.
Q6: What is included in my monthly loan payment?
Your monthly payment typically includes principal (the amount borrowed) and interest. Some loans may also include escrow for property taxes and insurance, but the base calculation shown here is principal and interest only.