Amortization Calculator
Amortization Schedule
| Payment # | Date | Payment | Principal | Interest | Remaining Balance |
|---|
Understanding Amortization
Amortization is the process of spreading out a loan into a series of fixed payments over time. Each payment consists of both principal and interest, with the interest portion decreasing and the principal portion increasing over the life of the loan.
How Amortization Works
When you take out a loan, the lender calculates your monthly payment using the loan amount, interest rate, and term. This payment amount stays the same throughout the loan term, but the composition of each payment changes over time:
- Early payments: Mostly interest, with a small portion going toward principal
- Later payments: Mostly principal, with a small portion going toward interest
Where:
P = Principal loan amount
r = Monthly interest rate (annual rate ÷ 12)
n = Number of payments (loan term in years × 12)
Practical Example: 30-Year Mortgage
For a $250,000 loan at 3.5% interest for 30 years:
Monthly Payment = $1,122.61
First payment: $729.17 interest, $393.44 principal
Final payment: $3.27 interest, $1,119.34 principal
Total interest paid over life of loan: $154,140.60
Key Amortization Concepts
Principal
The original amount borrowed, which decreases with each payment as you pay down the loan.
Interest
The cost of borrowing money, calculated as a percentage of the remaining principal balance.
Loan Term
The length of time over which the loan will be repaid (typically 15 or 30 years for mortgages).
Equity
The portion of the property you truly "own" - the difference between the property value and the remaining loan balance.
Types of Amortization Schedules
Fixed-Rate Amortization
The most common type, where the interest rate remains constant throughout the loan term, resulting in equal monthly payments.
Adjustable-Rate Amortization
The interest rate changes periodically based on market conditions, causing payment amounts to fluctuate after each adjustment period.
Interest-Only Loans
For a set period, you pay only the interest, after which payments increase significantly as you begin paying both principal and interest.
Balloon Payment Loans
Regular payments are calculated as if the loan will be paid over a long term, but a large "balloon" payment of the remaining balance is due after a shorter period (typically 5-7 years).
Benefits of Understanding Your Amortization Schedule
- Financial Planning: Helps you budget for the long-term costs of your loan
- Interest Savings: Shows how extra payments can reduce total interest paid
- Tax Planning: Helps estimate deductible interest for tax purposes
- Refinancing Decisions: Provides data to evaluate whether refinancing makes sense
- Equity Tracking: Shows how your ownership stake increases over time
How to Reduce Total Interest Paid
1. Make Additional Principal Payments
Even small extra payments applied directly to principal can significantly reduce total interest and shorten the loan term.
Example: $50 Extra Monthly Payment
On a $250,000 loan at 3.5% for 30 years:
- Reduces term by 2 years 10 months
- Saves $20,056 in interest
2. Refinance to a Shorter Term
Switching from a 30-year to a 15-year mortgage typically comes with a lower interest rate and builds equity faster.
3. Make Biweekly Payments
Making half your monthly payment every two weeks results in 26 half-payments (13 full payments) per year instead of 12, paying off the loan faster.
4. Recast Your Mortgage
After making a large principal payment, you can request the lender to recalculate (recast) your amortization schedule, reducing future payments while keeping the same term.
Frequently Asked Questions
Q: Why does so little of my early payment go toward principal?
A: Interest is calculated on the outstanding balance, which is highest at the beginning of the loan. As the lender takes more risk early on, they collect more interest upfront.
Q: How can I pay off my loan faster?
A: Making extra principal payments, even small ones, can significantly reduce your loan term and total interest. Specify that extra payments should be applied to principal.
Q: Does refinancing reset my amortization schedule?
A: Yes, refinancing creates a new loan with its own amortization schedule. This may mean paying more interest overall if you extend the term, even at a lower rate.
Q: How does amortization differ for car loans vs. mortgages?
A: The math is the same, but car loans typically have shorter terms (3-7 years) and higher interest rates, resulting in less dramatic shifts between interest/principal over the loan term.
Q: What's the difference between amortization and depreciation?
A: Amortization spreads loan payments over time, while depreciation is an accounting method that spreads the cost of an asset over its useful life for tax purposes.