Understanding the Amortization Calculator and Schedule

Unravel the concept of amortization - repayment of a loan in equal installments over time. Learn how each payment is split between the principal and interest.

The term 'amortization' reflects the process of eliminating debt over a set timeframe via regular, equal installments. These installments contain portions attributed to both the loan principal and the accrued interest.

To help calculate your amortization schedule, use an online amortization calculator. This tool calculates your loan amount, loan term, interest rate, and the date of your first payment. The calculator can assist in determining the overall balance you owe at any given time, how much additional payment would speed up the clearance of your mortgage, your home's current equity level and the total interest you will pay throughout the loan's duration.

What is Amortization?

Amortization is a financial term derived from the Latin word for “to die,” and it typically finds usage in two financial areas. Firstly, it is an accounting, where costs are distributed over a specific period. Secondly, it is in loans, where the borrower pays back a loan over time.

In a mortgage amortization scenario, each monthly payment is divided into portions that service the principal - the initial amount you borrowed - and the interest. In a conventional amortization setup, each installment consists of a substantial interest portion during the initial payment years. Each subsequent payment reduces the interest chunk while increasing the principal's share until the loan is paid in full.

Understanding Amortization Schedules

An amortization schedule, on the other hand, is a detailed breakdown of your monthly repayments from the start of your loan term to its end. It precisely outlines how much of each payment goes towards the principal or interest at various times throughout the loan term.

To expedite your mortgage clearance, you may opt to pay extra funds to the principal whenever possible. Another alternative is to re-amortize your existing loan, a process otherwise known as mortgage recasting. This setup involves making a substantial principal payment, resulting in lower monthly payments. Your loan term and interest rate remain the same, even after loan recasting.

Key Takeaways

• Understanding Amortization is crucial for managing long-term loans
• How to Calculate Monthly Mortgage Payments using amortization formulas
• What is an Amortization Schedule and how to read it
• Strategies for Speeding Up your Mortgage Payoff