Amortization calculator

How amortization works

A fixed-rate loan has one payment for its whole life. Each month the lender charges a month of interest on the balance you still owe, the payment covers that interest first, and whatever is left pays down the balance.

The payment never changes, but what it buys does. In the first years most of it is interest; by the end almost all of it is principal. The schedule below the chart shows the split for every year of the loan.

Extra payments go entirely to principal, so they cut every later month's interest too. That's why a small extra amount early on saves far more than the same amount paid near the end.

Questions

How is a monthly loan payment calculated?

Payment = loan × r ÷ (1 − (1 + r)^−n), where r is the yearly rate ÷ 12 and n is the number of months. $300,000 at 6.5% over 30 years is $1,896.20 a month.

Why is so much of each early payment interest?

Interest is charged on what you still owe, and early on you owe almost all of it. On that $300,000 loan the first payment is $1,625 of interest and $271 of principal. The split flips as the balance falls.

What does an extra monthly payment do?

Every extra dollar goes straight to the balance, so next month's interest is charged on less. $200 a month extra on the same loan saves about $103,000 of interest and pays it off almost 7 years early.

What does the calculator leave out?

Property tax, insurance, PMI, escrow and fees, and any change in rate. It's the principal-and-interest part of a fixed-rate loan, which is the part amortization describes.