What is amortization?
Each month, your mortgage payment goes towards paying off the amount you borrowed, plus interest, in addition to homeowners insurance and property taxes. Over the course of the loan term, the portion that you pay towards principal and interest will vary according to an amortization schedule. If you take out a fixed-rate mortgage, you’ll repay the loan in equal installments, but nonetheless, the amount that goes towards the principal and the amount that goes towards interest will differ each time you make a payment.
Over the course of the loan, you’ll start to have a higher percentage of the payment going towards the principal and a lower percentage of the payment going towards interest. With a longer amortization period, your monthly payment will be lower, since there’s more time to repay. The downside is that you’ll spend more on interest and will need more time to reduce the principal balance, so you will build equity in your home more slowly.
What is an amortization schedule?
Initially, most of your payment goes toward the interest rather than the principal. The loan amortization schedule will show as the term of your loan progresses, a larger share of your payment goes toward paying down the principal until the loan is paid in full at the end of your term.
A mortgage amortization schedule is a table that lists each regular payment on a mortgage over time. A portion of each payment is applied toward the principal balance and interest, and the mortgage loan amortization schedule details how much will go toward each component of your mortgage payment.
How do you calculate amortization?
An amortization schedule calculator shows:
- How much principal and interest are paid in any particular payment.
- How much total principal and interest have been paid at a specified date.
- How much principal you owe on the mortgage at a specified date.
- How much time you will chop off the end of the mortgage by making one or more extra payments.
This means you can use the mortgage amortization calculator to:
- Determine how much principal you owe now, or will owe at a future date.
- Determine how much extra you would need to pay every month to repay the full mortgage in, say, 22 years instead of 30 years.
- See how much interest you have paid over the life of the mortgage, or during a particular year, though this may vary based on when the lender receives your payments.
- Figure out how much equity you have in your home.
To use the calculator, input your mortgage amount, your mortgage term (in months or years), and your interest rate. You can also add extra monthly payments if you anticipate adding extra payments during the life of the loan. The calculator will tell you what your monthly payment will be and how much you’ll pay in interest over the life of the loan. In addition, you’ll receive an in-depth schedule that describes how much you’ll pay towards principal and interest each month and how much outstanding principal balance you’ll have each month during the life of the loan.
How do I calculate monthly mortgage payments?
Your monthly mortgage payments are determined by a number of factors, including your principal loan amount, monthly interest rate and loan term. A higher interest rate, higher principal balance, and longer loan term can all contribute to a larger monthly payment.
The monthly mortgage payment formula
Here’s a formula to calculate your monthly payments manually:
| Symbol |
| M |
the total monthly mortgage payment |
| P |
the principal loan amount |
| r |
your monthly interest rate Lenders provide you an annual rate so you’ll need to divide that figure by 12 (the number of months in a year) to get the monthly rate. If your interest rate is 5 percent, your monthly rate would be 0.004167 (0.05/12=0.004167). |
| n |
number of payments over the loan’s lifetime Multiply the number of years in your loan term by 12 (the number of months in a year) to get the number of payments for your loan. For example, a 30-year fixed mortgage would have 360 payments (30x12=360). |
Next steps in paying off your mortgage
If you want to
accelerate the payoff process, you can make biweekly mortgage payments or extra sums toward principal reduction each month or whenever you like. This tactic will have minimal impact on your budget, and it will still help you save significantly on interest.
If you can get a lower interest rate or a shorter loan term, you might want to refinance your mortgage. Refinancing incurs significant closing costs, so be sure to evaluate whether the amount you save will outweigh those upfront expenses.
Another option is
mortgage recasting, where you preserve your existing loan and pay a lump sum towards the principal, and your lender will create a new amortization schedule reflecting the current balance. Your loan term and interest rate will remain the same, but your monthly payment will be lower. With fees around $200-$300, recasting can be a cheaper alternative to refinancing.
Lastly, a
home loan modification brings the home loan current for borrowers experiencing financial hardship. While a loan modification might allow you to become mortgage-free faster, and could reduce your interest burden as well, this option may negatively impact your credit.