An amortization calculator is useful for understanding the long-term cost of a fixed rate mortgage because it shows the total principal you will pay over the life of the loan. It is also helpful in understanding how your mortgage payments are structured. If you’ve ever wondered how much of your monthly payment will go to interest and how much will go to principal, an amortization calculator is an easy way to get that information.
Key points to remember
- When you have a fully amortizing loan like a mortgage or car loan, you will pay the same amount each month. The lender will allocate a progressively smaller portion of your interest payment and a progressively larger portion of your principal payment until the loan is paid off.
- Amortization calculators make it easy to see how monthly loan payments are divided into interest and principal.
- You can use a regular calculator or a spreadsheet to do your own depreciation calculations, but an depreciation calculator will provide a faster result.
Estimate your monthly amortization payment
When you amortize a loan, you pay it back gradually through periodic interest and principal payments. A self-amortizing loan will be fully repaid when you make the last periodic payment.
The periodic payments will be your monthly principal and interest payments. Each monthly payment will be the same, but the amount that goes towards interest will gradually decrease each month, while the amount that will go towards principal will gradually increase each month. The easiest way to estimate your monthly amortization payment is to use an amortization calculator.
Explanation of the results of the amortization calculator
To use an amortization calculator, you will need these inputs:
Amount of the loan: How much are you planning to borrow or how much have you already borrowed?
Term of the loan: How many years do you have to repay the loan?
Interest rate: How much does the lender charge you each year for the loan?
With these entries, the Amortization Calculator will display your monthly payment.
For example, if your mortgage amount is $ 150,000, your loan term is 30 years and your interest rate is 3.5%, your monthly payment will be $ 673.57. The amortization schedule will also tell you that your total 30-year interest will be $ 92,484 ($ 92,484.13 to be precise, as the amortization schedule will show you).
For this and other additional details, you’ll want to dig into the amortization schedule.
What is an amortization schedule?
An amortization schedule gives you a full breakdown of each monthly payment showing how much goes towards principal and how much goes towards interest. It can also show the total interest you will have paid at any given time during the term of the loan and what your principal balance will be at any time.
Using the same $ 150,000 loan example above, an amortization schedule will show you that your first monthly payment will consist of $ 236.07 in principal and $ 437.50 in interest. Ten years later, your payment will be $ 334.82 in principal and $ 338.74 in interest. Your final monthly payment after 30 years will have less than $ 2 in interest, with the remainder paying off the last balance of your principal.
How do you calculate an amortization plan yourself?
A loan amortization schedule is calculated using the loan amount, the loan term and the interest rate. If you know these three things, you can use Excel’s PMT function to calculate your monthly payment. In our example above, the information to enter in an Excel cell would be = PMT (3.5% / 12,360 150,000). The result will be $ 673.57.
Once you know your monthly payment, you can calculate how much of your monthly payment goes to principal and how much goes to interest using this formula:
Principal payment = Total monthly payment – [Outstanding Loan Balance x (Interest Rate/12 Months)]
Multiply $ 150,000 by 3.5% / 12 to get $ 437.50. This is your interest payment for your first monthly payment. Subtract it from your monthly payment to get your principal payment: $ 236.07.
Next month your loan balance will be $ 236.07 lower, so you’ll repeat the calculation with a principal of $ 149,763.93. This time your interest payment will be $ 436.81 and your principal payment will be $ 236.76.
Just repeat this 358 times and you will have an amortization schedule for a 30-year loan yourself. Now you know why using a calculator is so much easier. But it’s good to understand how the math behind the calculator works.
You can create an amortization schedule for an adjustable rate mortgage, but that involves guesswork. If you have an ARM 5/1, the amortization schedule for the first five years is easy to calculate because the rate is fixed for the first five years. After that, the rate will adjust once a year. The terms of your loan indicate by how much your rate can increase each year and the highest rate can go, as well as the lowest rate.
How to calculate depreciation with an additional payment
Sometimes people want to pay off their loans faster to save money on interest. Even if you have a low interest rate, you might decide to make an additional payment on your principal when you can afford it because you don’t want to be in debt.
If you wanted to add $ 50 to each monthly payment, you could use the formula above to calculate a new amortization schedule and see how long you would pay off your loan sooner and how much interest you would have to pay less. In this example, investing an additional $ 50 per month on your mortgage would increase the monthly payment to $ 723.57.
Your interest payment in month 1 would still be $ 437.50, but your principal payment would be $ 286.07. Your loan balance for the second month would then be $ 149,713.93 and the interest payment for the second month would be $ 436.67. You will have already saved 14 cents in interest! No, it’s not very exciting. What’s exciting is that if you held it until your loan was paid off, your total interest would rise to $ 80,545.98 instead of $ 92,484.13. You would also be free of your debts almost three and a half years earlier.
Mortgage amortization is not the only one
We’ve talked a lot about mortgage amortization so far, because that’s what people usually think of when they hear the word “amortization”. But a mortgage is not the only type of loan that can pay off. Auto loans, home equity loans, student loans, and personal loans are also amortized. They have fixed monthly payments and a predetermined repayment date.
What types of loans do not amortize? If you can borrow money again after you’ve paid it off and you don’t have to pay off your entire balance by a certain date, then you have an amortizing loan. Examples of non-amortizing loans are credit cards and lines of credit.
How can using an amortization calculator help me?
Our amortization calculator can help you do several things:
- See how much principal you will owe at a future date during the term of your loan.
- See how much interest you’ve paid on your loan so far.
- See how much interest you will pay if you keep the loan until the end of its term.
- Figure out how much equity you should have if you question your monthly loan statement.
- See how much interest you’ll pay over the life of a loan and show the impact of choosing a longer or shorter loan term or getting a higher or lower interest rate.
The bottom line
An amortization calculator offers a convenient way to see the effect of different loan options. By changing the inputs (interest rate, loan term, amount borrowed), you can see what your monthly payment will be, how much of each payment will go to principal and interest, and what your long-term interest charges will be. This type of calculator works for any loan with fixed monthly payments and a set end date, whether it’s a student loan, car loan, or fixed rate mortgage.