How Loan Amortization Works
Amortization is the process of spreading out a loan into a series of fixed payments. While your monthly payment stays the same, the portion that goes toward interest decreases over time, while the portion going toward the principal increases.
Key Loan Components
- Principal: The actual amount of money you borrowed.
- Interest Rate: The cost of borrowing the money, expressed as a percentage.
- Term: The length of time you have to repay the loan (e.g., 15 or 30 years).
Why Make Extra Payments?
Even a small extra monthly payment can significantly reduce the total interest you pay over the life of the loan. This is because extra payments go directly toward the principal, reducing the balance upon which future interest is calculated.
Formula Used
Our calculator uses the standard fixed-rate mortgage formula:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1 ]
Where: M = Monthly payment, P = Principal, i = Monthly interest rate, n = Number of months.