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Whether you’re a first-time homebuyer or a seasoned pro—you might not fully understand amortization.
Amortization refers to the process of gradually paying off a debt, typically a loan, through regular payments that include both principal and interest.
When paying back a loan, each payment is put towards the interest owed on the loan, and then any remaining amount is applied towards reducing the loan principal.
As the loan principal is reduced, the interest on subsequent payments also decreases. This continues until the loan is fully paid off.
With an amortization calculator, you can understand the true cost of a loan, including the total interest paid over time and how much of each payment goes toward principal and interest.
We’re here to provide a clear understanding of how to use an amortization calculator to make informed financial decisions.
Related reading: What experts are predicting about mortgage rates
What is a loan amortization schedule?
A loan amortization schedule shows the breakdown of each payment made on a loan over time. It provides a detailed schedule of the amount of each payment that goes towards principal and interest, as well as the remaining balance of the loan after each payment.
The amortization schedule is calculated based on the loan amount, interest rate, and loan term.
A schedule includes:
- The payment date
- Payment amount
- Amount of interest paid
- Amount of principal paid
- Remaining balance
Learn more: The difference between principal and interest on a mortgage
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Using an amortization calculator
You can use an amortization calculator to streamline this process and generate an amortization schedule.
To figure out your own schedule, take the entire loan amount and multiply it by the interest rate for the first month.
Then, divide the result by 12 to get the monthly interest for a loan with monthly payments.
The amount of money that goes towards paying off the principal can be calculated by subtracting the interest from the total monthly payment.
For the second month, the same procedure should be followed, but using the remaining principal balance from the previous month instead of the original loan amount.
This should be repeated for each subsequent month until the end of the loan term. The goal is to ensure that the principal balance reaches zero by the end of the loan term.
Let’s assume you take on a 30-year mortgage for $480,000 at a 5% interest rate that carries a monthly payment of $2,576.
- First month: Take $480,000 and multiply it by 5% to get $24,000. Divide that by 12 and you will get $2,000 in interest for your first monthly payment while $576 goes toward your principal.
- Second month: Deduct $576 from your principal balance of $480,000, which equals $47,942. Multiply that by 5% and divide by 12, which equals $1997.6 going toward interest.
Gradually over the ensuing months, less money will go toward interest, and your principal balance will get whittled down faster and faster.
Let’s look at a visual example
Below is an amortization schedule for $330,000 for a 30-year fixed mortgage with a 4.5% interest rate.
|Payment ($)||Payment ($)||Principle ($)||Interest ($)||Total Interest ($)||Outstanding balance ($)|
|Jan, 2023||1,672.06||434.56||1,237.3||1,237.5||329, 565.44|
Why you should use an amortization calculator
An amortization calculator can quickly calculate a loan repayment schedule, which saves time compared to manually calculating the payments.
An amortization calculator uses a formula to generate a loan repayment schedule, which ensures accurate results. This is especially useful when dealing with complex loan terms, such as those with varying interest rates or payment frequencies.
You’ll get a clear breakdown of each payment, including the amount of principal and interest paid. This can help borrowers understand how much they’re paying for the loan and how much they still owe.
This information can be used to create a budget and set financial goals. Additionally, the “what-if” analysis feature can help borrowers make informed decisions about refinancing or making additional payments to the loan.
Related reading: Your Simple Guide on buydowns
Get the guidance you need with Homefinity
An amortization calculator is a useful tool that can help borrowers better understand their loan payments and make informed financial decisions.
If you have a loan or are planning to take out a loan, consider an amortization calculator to better understand your loan payments and repayment schedule.
Check out all of Homefinity’s calculators throughout your mortgage process:
- Learn how much house you can really afford with an affordability calculator
- Figure out when to refinance with our refinance calculator
- Estimate your monthly payment with our mortgage payment calculator
- Compare different outcomes with our loan comparison calculator
Homefinity’s experienced team is dedicated to finding the best loan options for you, taking into account factors such as your credit history, down payment, and the type of property you’re interested in.
Contact us today for more information and to get started on your journey to homeownership.
Photo by Karolina Grabowska