How do I Calculate Annuity Payments?

Patrick Roland

Annuity payments are financial deposits that represent a fixed schedule of payments for a finite amount of time. Home mortgage payments and retirement funds are two common types of annuity. In order to calculate the value of annuity payments you must gather a great deal of information, like the interest rate, principle and payment schedule, and apply it to a complex mathematical equation. Fortunately, there are also online calculators that do the math for you, ensuring a more accurate prediction.

An annuity is a type of contract between an individual and an insurance company.
An annuity is a type of contract between an individual and an insurance company.

Annuity payments can be applied to any number of financial responsibilities. Generally, lending institutions set up annuities in order to help clients manage payments for large items they could not purchase in one lump sum. The lending institution, instead, lends the client the lump sum for purchase and sets up a repayment schedule. Lending institutions, like banks, charge annuity interest on top of the money to be repayed along with the principle amount owed. Annuities are initially planned based on a client's income level, credit score, and other factors, and can range from payment schedules from a few months to several decades.

Home mortgage are a type of annuity.
Home mortgage are a type of annuity.

An example of annuity payments would be purchasing a home. Most homebuyers require a large sum of money from a bank in order to buy a home. A traditional situation is a fixed annuity schedule of 30 years for repayment. Over the next three decades the bank will technically own the home until the original principle and all interest are paid off in monthly installments.

In order to calculate your annuity payments you must research several financial factors regarding this loan. The principle amount borrowed is the base factor for all calculations. In addition, you must know the interest rate and the number of payments on the loan. With these three factors you can calculate annuity rates on the value of the loan by using a complex equation: Principle/[(1-(1/(1 + Interest)Payments))/Interest]. For example, if a loan is worth $150,000 US Dollars (USD), with an interest rate of .005833 over the course of 360 payments, the calculation would look like this: 150,000/[(1-(1/(1.005833)360))/.005833] = a monthly payment of $997.95 USD.

If you are not confident in your mathematical skills, there are helpful options available online. Free annuity calculators are easy to find with a basic search. These tools allow you to input principle amounts, payment schedule and interest to get the monthly payment figure instantly.

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