How to Calculate Change of Payment Terms

Many loan accounts come with variable terms. It's important to know how to calculate your new payment when your interest rate adjust--especially on mortgage loans. While online calculators can give you a quick summary of your new payment, learning how the payment calculation works will help you understand where your money is going.

Instructions

1

Review your loan paperwork--especially the note. The note is the document that breaks down the particulars of your loan like interest rate, annual percentage rate (APR), term (length) and payment. Pull out your mortgage note from the package of mortgage documents if you are calculating a mortgage payment.

2

Calculate the new rate, if you are calculating a new mortgage payment on an ARM or variable mortgage. To calculate the new rate, add the margin (a fixed rate clearly listed on your mortgage note) to the index. Your index is a fluctuating market rate. Common indexes are the Prime Rate and the London InterBank Offered Rate (LIBOR). See Resources for common index values. Add the current value of the index to the margin to get your new rate.

3

Calculate your new payment with the following formula: Payment = P x [J / 1 - (1 + J) ^ -N]. Use the following variables: P = principal loan amount, J = interest in decimal form, and N = term in months. The notation "^" means exponent. For example, to calculate a payment on a $10,000 loan with a 6 percent interest rate and a five-year term (60 months), the formula would look like this: Payment = 10,000 x [.005 / 1 - (1 + .005) ^ -60]. It's easier to do exponent calculations online. The monthly payment here is $193.

4

Use the formula in Step 3. Enter your interest rate (in monthly decimal form; interest rate divided by (12 x 100) and term. Do the exponent calculation first.

5

Confirm the accuracy of your calculation with the loan calculator in Resources.