The Amortization Calculator is a tool that enables you to compute every detail about an amortized loan. Let’s say you’re thinking about getting a long-term loan, a home mortgage for example. There are many things you’ll want to know before making your decision.
You will want to know the answers to the following questions:
- How much is the total interest?
- How much is the total payment?
- How to calculate loan amortization?
- How to calculate mortgage principal and interest?
- What should my amortization schedule look like?
You may also want to know what will happen if you add extra payments here and there or what you’ll owe on a specific date. While the calculations behind this may be complicated, you don’t need to be a math wizard in order to find answers to these questions. All you need is your loan parameters, and the calculator will do all the heavy lifting for you.
What Is Amortization Schedule Calculator?
Amortization, in this case, means that we have our debt paid in equal installments. Payments are set to a certain amount and that amount stays fixed the whole time. There are two elements that make every installment: loan principal and accrued interest.
It is important to understand the dynamics of these two over time. While the monthly payment stays the same, its elements are changing. The principal part of every installment grows over time. It starts small and gradually increases with each installment.
So, the accrued interest in every installment goes in the opposite direction. It starts at its highest and declines with each installment. In other words, the ratio between interest and principal grows over time in favor of principal. In practical terms this means we pay mostly interest in the beginning.
How to Calculate Monthly Payment on Mortgage
For this we use the formula: M= P[r(1+r)^n/((1+r)^n)-1)]
M – the total monthly mortgage payment
P – the principal loan amount
r – monthly interest rate. We get this by dividing the annual interest rate by 12. For example if annual rate is 5%, than r = 0.004167 (0.05/12=0.004167).
n = complete number of installments. For a 30-year fixed mortgage, we would have 360 payments (30 years times 12 months).
Let’s see how it works. Imagine we’re looking to find a monthly payment for a loan amount of $1000. The annual interest rate is 5%, and we have one year to repay. In terms of our formula, M is the monthly payment we are looking for.
The initial principal of $1.000 is P. Annual rate is 5% but we need a monthly rate, so we divide that by 12, 0.05/12=0.004167, and that is how we get our ‘r.’ One year repayment period means we have 12 payments, one payment per month which gives us our n. Solving this gives us the result of 85.6076. This means our fixed payment amount per month is $85.61.
Amortization Schedule
At this stage, you might be wondering: “How do I make an amortization schedule for a mortgage?” Using the calculator, one can calculate an entire amortization schedule.
An amortization schedule is simply a list that shows us all the components of our mortgage over its lifetime. This means principal and interest in every single payment, total interest, and your closing balance.
That gives you an insight into all relevant details of each and every single installment. For example, the amount of unpaid balance after a specific payment and the total interest paid up to that point.
For our previous example, the amortization schedule gives 12 equal payments of $85.61 and the total interest paid at $27.29. Let’s take a closer look at the first month. We can clearly see that our payment of $85.61 consists of principal and interest, $81.44 and $4.17 respectively.
After we subtract the paid principal from the remaining debt, we get the closing balance. In this case, we deduct $81.44 from $1,000, which equals $918.56. The same logic applies to every other month.
FAQs
How Do You Calculate a 30-year Amortization Schedule?
Let’s say we have a mortgage amount of $165.000 and let’s assume the repayment period of 30 years at the annual rate of 4.5%. Entering these parameters in our calculator we will get the following results.
We see that our total principal is $165,000 (the actual loan), but we also see total interest paid, which is $135,971.07. An economist would interpret this as the price one pays for the commodity of a long-term mortgage. This particular loan costs you $135,971.07 that you’re giving up in order to have a 30-year mortgage.
In the amortization schedule, we see that our monthly installment is $863.03, and you may notice it stays fixed the whole time. On the other hand, we see that the interest is slowly decreasing, starting from $618.75, and going all the way to $3.12 in the last payment.
On the other hand, the principal starts at its lowest in the first payment at $217.28. It continues to grow until it reaches its highest value at $832.91 in the last payment. After 30 years or 360 installments, the total unpaid balance is exactly 0. The debt is fully paid for.
What Happens if I Pay an Extra $200 a Month on My Mortgage?
The amortization schedule calculator can help you plan to repay your mortgage early. Let’s suppose you’re adding an extra payment, $200 a month. Entering this in our calculator gives us a new amortization schedule. Your monthly payment is obviously higher now. If you add $200 on top of the $863.03, you will eventually have $1,036.03 a month.
How Does This Affect the Repayment Time?
Your total repayment time drops from 30 years to only 20 years and three months. Adding extra payments, in this case, results in 10 years difference in repayment time. Consequently, this type of loan is cheaper. Instead of paying $135,971.07 in interest, for a 30-year mortgage, you pay $86,713.25. So, the longer your repayment time is, the more it will cost you.
Using the calculator can help you find an optimal mortgage and can help you save some money with extra payments. Play with it using different loan parameters and see what combination suits you the best.