Amortization Formulas:
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Definition: This calculator shows the breakdown of each mortgage payment into principal and interest over the life of the loan.
Purpose: It helps borrowers understand how much of each payment goes toward the loan principal versus interest, and how the loan balance decreases over time.
The calculator uses these formulas for each payment period:
Where:
Explanation: Each payment first covers the interest due on the remaining balance, with the remainder applied to reduce the principal.
Details: Understanding amortization helps with financial planning, shows the true cost of borrowing, and reveals how extra payments can shorten the loan term.
Tips: Enter the loan amount, annual interest rate, and loan term in years. The calculator will show the monthly payment and full amortization schedule.
Q1: Why does most of my early payment go toward interest?
A: Early in the loan, the balance is highest so more interest accrues. As the balance decreases, more of each payment goes toward principal.
Q2: How can I pay less interest overall?
A: Make extra principal payments, refinance to a lower rate, or choose a shorter loan term.
Q3: What's the difference between interest rate and APR?
A: The interest rate is the cost to borrow principal, while APR includes fees and other loan costs.
Q4: How does changing the loan term affect payments?
A: Shorter terms mean higher monthly payments but less total interest. Longer terms lower monthly payments but increase total interest.
Q5: Can I see the effect of making extra payments?
A: This basic calculator shows the standard schedule. For extra payments, use an advanced amortization calculator.