The process of progressively repaying a debt over a predetermined period of time by making a number of fixed, periodic payments is known as amortization. Both the principal on the borrowed loan and interest on the debt are included in the payment. Initially, a larger portion of each month’s payment will be applied to interest. Less interest is owed on the remaining loan balance as principal is paid in full. An amortization calculator can be used to estimate the amortization of your home loan.
This amortization schedule calculator allows you to create a payment table for a loan with equal loan payments for the life of a loan. The amortization table shows how each payment is applied to the principal balance and the interest owed.
Payment Amount = Principal Amount + Interest Amount
Say you are taking out a mortgage for $275,000 at 4.875% interest for 30 years (360 payments, made monthly). Enter these values into the calculator and click “Calculate” to produce an amortized schedule of monthly loan payments. You can see that the payment amount stays the same over the course of the mortgage. With each payment the principal owed is reduced and this results in a decreasing interest due.
Most typical car loans and mortgages have an amortization schedule with equal payment instalments. The payment amount is the same over the life of the loan but the way the payment is applied changes: the portion of the payment applied toward the principal increases over time, and the portion applied to interest decreases because you owe less principal.
What is Amortization?
Amortization is a term that comes from the Latin word for “to die.” It’s typically used in two areas of finance: as an accounting term for spreading a cost over a period of time; and in lending to refer to the process of paying back a loan over a period of time.
With mortgage amortization, a portion of your monthly payment goes toward the principal, or the amount you borrowed, and another portion goes to interest.
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For the amortization on a fixed-rate mortgage, you’ll repay the loan in equal installments, with interest making up a larger piece of the payment than principal at first. These installments are outlined in the amortization schedule.
Say you take out a $300,000 30-year mortgage with a 6 percent interest rate. Excluding any additional fees and costs, your monthly payment would be $1,799 for the duration of the loan. However, your first payment would consist of $1,500 paid to interest and the remaining $299 paid to principal. Your second payment would consist of $1,498.51 paid to interest — a slight reduction from the first payment. Over time, you’ll etch away at the principal, paying less towards interest and more towards principal with each payment until the loan is paid off.
How to Use This Amortization Calculator
- Enter your loan amount. In the Loan amount field, input the amount of money you’re borrowing for your mortgage.
- Enter your loan term. In the Loan term field, input the length of your loan. This might be 30 years, 15 years or another time frame.
- Enter your interest rate. In the Interest rate field, input the interest rate you’re paying on your mortgage.
- Enter your loan start date. In the Loan start date field, input the month when you made your first payment.
After you’ve input this information, you can see how your payments will change over the length of the loan.
Additionally, this calculator can help you:
- Determine how much principal you owe now or will owe at a future date.
- Determine how much extra you’d need to pay every month to repay the full mortgage in a shorter time frame.
- Determine how much equity you have in your home.
- See how much interest you’ve paid over the life of the mortgage, or during a particular year (though this might vary based on when the lender receives your payment).
How to Calculate Amortization
The principal loan amount, monthly payment amount, loan duration, and interest rate must all be known in order to create an amortization schedule. Using the following amortization formula, our amortization calculator will compute the monthly principal payment, interest payment, and remaining loan balance for you.
Step 1: Convert the annual interest rate to a monthly rate by dividing it by 12.
Annual interest rate/ 12 = monthly interest rate
Step 2: Multiply the loan amount by the monthly rate to get the interest payment.
Loan amount * monthly rate = interest payment
Step 3: Subtract the monthly mortgage payment from the interest to determine the principal payment.
Monthly mortgage payment – interest payment = principal payment
Step 4: Subtract the principal from the loan amount to get the outstanding loan balance.
Loan amount – principal payment = outstanding loan balance
The above steps calculate monthly amortization for the first month out of the 360 months in a typical 30-year loan. For the remaining months, repeat steps two through four using the previous outstanding loan balance as the new loan amount for the next month in the schedule.
For example, you can use the steps above to calculate amortization on a 30-year fixed-rate mortgage valued at $200,000 with a 3% interest rate (0.0025 monthly rate) and a monthly payment amount of $843. In a spreadsheet, show the first payment in row one, the interest payment in one column, the principal payment in the next column and the loan balance in the last column.
| Payment | Interest | Principal | Balance |
|---|---|---|---|
| Payment 1 | $200,000 x 0.0025 = $500 | $843-$500 = $343 | $200,000 – $343 = $199,657 |
| Payment 2 | $199,657 x 0.0025 = $499 | $843 – $499 = $344 | $199,657 – $344 = $199,313 |
You can make additional principle payments at any time to speed up the mortgage payback process. You may choose to do this once a year, every two weeks, with your monthly payment, or anytime you have additional money.
Mortgage recasting, which amortizes your current loan, is an additional choice. A few hundred dollars will be added to the principle as well as a lump sum payment for the recast. Your monthly payment will be less, but your loan duration and interest rate will be the same.
