Trying to figure out what the monthly payment on a loan will be, but don’t have a financial calculator handy? Here are some quick rules of thumb that I’ve come up with that will give you a pretty good estimate of the monthly payment (and what portion of that payment is initially interest) for a 30-year fixed-rate mortgage (or the initial payments for a 30-year adjustable-rate mortgage).

Rule of 6: At a 6% interest rate, the monthly payment will be $6 for every $1000 of the loan amount.

Using this rule, a $300,000 30-year loan at 6% has an estimated monthly payment of $300,000 / $1000 x $6 = $1800; the actual monthly payment for that loan is $1798.65. For some people, it's easier to think of this rule as “drop the thousands part of the loan amount, and multiply by 6″; using that way of looking at it, a $650,000 30-year loan at 6% has an estimated monthly payment of 650 x $6 = $3900, and an actual payment of $3897.08.

Rule of 8: For every 1/8 of a percentage point (0.125%) that the interest rate changes from 6%, the monthly payment will change by $8 for every $100,000 of the loan amount.

Using this rule to estimate the payment on a $300,000 30-year loan at 6.375% first involves estimating the payment for the same loan at 6%; as we saw above, that estimate is $1800. Since 6.375% is an increase of three-eighths of a percentage point from 6%, the difference is +3 x $300,000 / $100,000 x $8 = $72, so the estimated monthly payment would be $1872, vs. an actual payment of $1871.61. Again, for some folks, it's easier to just mentally shift over the decimal place rather than dividing by $100,000, in which case you could convert the rule to be “shift the decimal 5 places left in the loan amount, multiply by $8, and then multiply by the number of eighths of a percentage point difference bettwen the rate and 6%”. Looking at a $650,000 30-year loan at 5.75% in that way, we could shift the decimal in the loan amount 5 places left, giving us $6.5; we would multiple that by $8, and then multiply it again by -2 since 5.75% is two-eighths lower than 6%. 6.5 x $8 x -2 = -$104; we know using the Rule of 6 (above) that the estimated payment for a $650,000 loan at 6% is $3900/mo, so the estimated payment for the 5.75% loan is $3900 – $104 = $3795/mo, vs. an actual payment of $3793.22. (And another variation to cater to different math styles: it might be easier for you to do the math by saying that 5.75% is two-eighths different from 6%, calculating the corresponding $104 change, and then reasoning that since 5.75% is lower than 6%, you need to subtract that $104 from the initial $3900, rather than turning “a decrease of two-eighths” into a difference of “-2″ as I did above. Go with whatever floats your mathematical boat.) Note that this rule isn’t as precise as the Rule of 6, because that $8 factor that we use isn’t actually linear–the further you get from 6%, the larger it should be, so that at 12%, for example, the value used should be closer to $8.92. “The Rule of 8, or $8.92 at 12%” isn’t nearly as easy to remember, however, and the $8 factor is fairly accurate for interest rates between 4% and 8%, where rates are expected to stay for the forseeable future.

Rule of 5 and 10: At a 6% interest rate, the portion of the monthly payment that is initially interest is $5 for every $1000 of the loan amount, and for every 1/8 of a percentage point (0.125%) that the interest rate changes from 6%, the monthly payment will change by $10 for every $100,000 of the loan amount.

The interest portion of your mortgage payment is usually tax-deductible, so sometimes people want to estimate that as well to see how a given mortgage will affect their take-home pay each month; once you know the Rules of 6 and 8, all you have to remember is that for the interest portion of the initial payments, the analogous factors are $5 per $1000, and $10 per $100,000, while the things you are measuring against remain 6%, and eighth-of-a-percentage-point changes from 6%, respectively. For that same $300,000 30-year loan at 6%, then, the estimated portion of the initial payment that will be interest is $300,000 / $1000 x $5 = $1500; the actual interest portion of that payment, as it turns out, is also exactly $1500. For the $650,000 loan at 5.75%, the estimated interest portion at 6% would be $650,000 / $1000 x $5 = $3250, and since 5.75% is two-eighths lower than 6%, that changes the estimated interest portion by -2 x $650,000 / $100,000 x $10 (or -2 x 6.5 x $10 if you prefer) = -$135, so the estimated interest portion of the initial payments is $3250 – $135 = $3115, vs. the actual number of $3114.58. (As with the Rule of 8, the $10 factor isn’t linear, but should be fine for interest rates between 4 and 8%. Also, it’s worth noting that while your monthly payment stays the same over the life of a fixed-rate loan, the portion of that payment that is interest doesn’t; at the beginning, almost all of your payment goes towards interest, while at the end of the loan, almost all of the payment goes towards principal, so the Rule of 5 and 10 is most accurate when looking at the first months of a loan.)

Interested in getting more accurate numbers about monthly payments? Let us know what you are looking for and we’d be glad to run some more specific numbers for you.

Possibly related posts (automatically generated):

1. Estimating Monthly Payments
2. FHA/VA Adjustable-Rate Mortgages Can Be A Great, Safe, Deal
3. Mortgage Scenario Snapshot 10/26/09
4. Mortgage Scenario Snapshot 10/22/09
5. FHA changes mortgage insurance premiums
6. Buyer-Paid Private Mortgage Insurance (PMI) now deductible.
7. Mortgage Scenario Snapshot 12/5/09
8. PITI
9. HUD Increases FHA Mortgage Insurance Premiums
10. More on ARM sticker-shock

Tags: mortgage, tips