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Mortgage Amortization Calculator

Mortgage and real estate calculators

What is Mortgage Amortization?

Mortgage Amortization refers to the process of gradually reducing a debt through specified, regular payments over a set period of time. When we talk about a mortgage loan being amortized, we're essentially talking about the process through which that mortgage loan is paid off over time. It's important to understand that these payments are structured so that you pay a specific amount each month, and these payments are divided between the interest on the loan and the principal amount of the loan.

A good way to conceptualize the process of mortgage amortization involves a mortgage amortization table. Such a table shows how each payment relates to the principal (the initial amount borrowed) and the accrued interest on the remaining balance of the loan. Early on in your mortgage payments, a significant portion of each payment is applied towards the interest, while with each subsequent payment, a higher percentage goes towards paying off the principal.

As an example, let's say we have a $150,000 mortgage loan, taken out over a 30-year term, with an annual interest rate of 6 percent. Early in the amortization term, the interest portion of each payment would be high, while the amount applied to the principal would be relatively low. However, as the term progresses, the interest payment decreases significantly and the principal payment increases to match.

How to Use a Mortgage Amortization Calculator?

When using a mortgage amortization calculator, there are specific inputs to consider:

  1. The principal amount being loaned. This constitutes the debt to be paid off during the amortization term.

  2. The term of the loan, or the period over which the principal balance is paid off. Commonly for mortgage loans, this is usually set at 20 or 30 years, though it can sometimes extend up to 40 or 50 years.

  3. The annual interest rate, which should be understood to be nominal and so may not fully represent the total cost of the mortgage. Factors such as the frequency of compounding can affect the total amount of interest charged on the principal.

  4. The frequency of compounding indicates how often the interest is calculated and added to the principal.

  5. An additional monthly payment amount, which directly impacts the mortgage amortization schedule. By adding this to your regular mortgage payments, you can significantly reduce both the interest paid and the overall term of the loan.

  6. The date of the first payment—this allows for accurate tracking of due dates in the amortization schedule.

After the relevant information has been entered into the calculator, it provides three outputs:

  1. A loan summary that includes the monthly payment, total payment amount, and total accrued interest, both with and without an extra monthly payment.

  2. An interactive graph that shows the balance of the loan, total interest, and total principal amounts over time.

  3. The amortization table, which details the payment schedule for the life of the loan. This includes the interest and principal paid and the outstanding balance after each payment.

Practical Example

Let's consider a $150,000 loan with an annual interest rate of six percent, to be repaid over a 30-year term. The total interest charged without any additional payments would amount to $173,757 over the life of the loan.

Now, let's see what happens when we decide to add a mere $50 extra to each monthly payment. The additional $50 brings up the total monthly payment to $949 from the original $899. This seemingly small addition to the monthly payment results in substantial savings in the long run. The loan term shortens by almost four years (3 years and 11 months), and the total amount of interest paid drops by $26,673!

The more you pay off the principal amount, the less interest there will be to pay. So, it's always beneficial to repay the mortgage with higher installments. Small extra payments can dramatically shorten the amortization term and significantly reduce the amount of interest you pay.

In conclusion, when taking out a mortgage, remember to consider all the potential costs that might accrue. This is especially crucial for long-term mortgages combined with a smaller down payment.

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