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- 1). Go over your household budget so you have an accurate picture of how much money is being brought into the home each month and how much you must pay out for household expenses.
- 2). Review your savings and other sources of equity to determine how much of a down payment you can realistically afford on a home. The more money you put toward the mortgage, the less your monthly payments will be. A higher down payment will also decrease the interest rate on the mortgage loan, further decreasing your payments.
- 3). Determine how much you can afford on a mortgage payment each month based on your income, expenses and savings. Most experts agree that the mortgage shouldn't exceed 20 percent of your monthly income.
- 4). Make an appointment with a mortgage lender to get pre-approved for a loan. Depending on the loan amount and interest rate you are approved for, shop around and get quotes from multiple lenders.
- 5). Calculate your monthly loan payments using the algebraic formula P = L [c (1 + c) n] / [ (1 + c) n - 1]. In this formula, "P" equals the monthly loan payments, "L" equals the total mortgage amount, "c" equals the monthly interest rate and "n" equals the number of months of the loan. The value "n" is an exponent. If you don't have a scientific calculator with an exponent function, you can use the online exponential calculator at http://www.analyzemath.com/Calculators_2/power_calculator.html.
- 6). Determine the monthly interest rate by dividing your annual percentage rate by 12. For example, if your APR is 5 percent (or 0.05), the monthly interest rate would be 0.00416667. Plug this value into the formula for "c."
- 7). Calculate the number of months of your mortgage by multiplying the number of years you'll be paying off your mortgage by 12. A 30-year mortgage, for example, would equal 360 months. In this example, the exponent, "n," is equal to 360.
- 8). Plug the values into the formula to solve for "P," which equals the monthly mortgage loan amount you'll be responsible for paying on the home. In this example, the formula would look like this for a $100,000 mortgage: P = 100,000 [0.00416667 (1 + 0.00416667) n] / [ (1 + 0.00416667) n - 1].
- 9). Solve the equation by working from the inside. Begin by finding the value of (1 + c) to the nth power. Use the addition function on your calculator to determine the sum of (1 + C) and then use the exponential function to raise the sum of (1 + c) to the nth power. In our example, the sum of (1 + 0.00416667) equals 1.00416667. Raised to the 360th power, the value becomes 4.4677496.
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Plug the "found" values into the equation so that it becomes simpler to solve. In this example, the equation can be simplified to: P = 100,000 [0.00416667 (4.4677496) ] / [(4.4677496 - 1]. The mathematical equations in the brackets must be solved prior to solving for "P." The product of multiplying 0.00416667 and 4.4677496 is 0.018615638225832. In the second bracket, the numbers 4.4677496 and 1 must be subtracted. - 11
Complete the equation to determine your mortgage loan amount. With the information you've found so far, your formula should look something like this: P = 100,000 [0.018615638225832/3.4677496]. To find the value of "P," divide the numbers within the brackets first, and then multiply that number by 100,000, or the amount of your total mortgage amount. In this example, the monthly mortgage amount equals $536.82.
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