Have you recently taken a home loan, car loan, or personal loan? One way to know what goes into your monthly loan payments is to use an amortization calculator. It can help you to create an amortization schedule and plan for the repayment of the loan.
Amortization calculators work with fixed-rate loans and mortgages. So, you won’t be able to use it for adjustable-rate mortgages, lines of credit, or variable-rate loans. Even for fixed-rate mortgages and loans, an amortization calculator won’t account for extra fees.
What Is Amortization?
Amortization is the process of determining how much you should pay towards a loan or mortgage over time. It involves offsetting a debt in equal monthly installments. Each payment is in two parts – one pays off the loan of mortgage principal and the other interest.
At the beginning of the payments, the amount for the principal is usually small but keeps growing as the period progresses. That means a larger part of your initial loan payments goes towards interest payments.
As you repay the loan, the payment on principal will become lar than the interest payment. Monthly Payments are usually lower when the amortization period is substantially longer since you have more time to repay. Otherwise, you should expect to make higher monthly payments.
However, a longer amortization period has disadvantages since it takes longer to reduce the principal amount on your loan or mortgage. Therefore, building equity in you long is prolonged and painstaking.
Besides the portions going towards the principal and interest payment, monthly payments also consist of property taxes and homeowner’s insurance. These extra costs are not included in the amortization schedule, so you must account for them separately.
How to Use an Amortization Calculator
Our amortization calculator is extremely easy to use. All you need to do to get the results you want is to input the right figures and ratios. Here is an outline of the steps you must undertake:
Step 1: Enter the Loan or Mortgage Amount
To use our amortization calculator, you must first enter the loan amortization amount, which represents the money advanced to you by the lender. The loan or mortgage amount may reduce based on whether or not you’ll make a down payment.
Say you intend to borrow a mortgage for a house worth $300,000. Your mortgage will be $300,000 if you don’t put down any money. With a down payment, this amount will reduce significantly.
Step 2: Enter the Down Payment
A down payment is an initial cost that reduces the value of the mortgage principal. It can be presented as an absolute figure or as a percentage. A larger down payment substantially reduces the loan amount leading to lower monthly payments.
Our amortization calculator allows you to enter a percentage representing the down payment. For the sake of an illustration, say you intend to put down 10 percent of the loan amount or $30,000. That means that the loan amount to amortize is $270,000.
Step 3: Enter the Interest Rate
Interest is what you pay for borrowing money. Interest is a ratio or percentage used to compound the loan amount resulting in interest. A typical amortization calculator works for a fixed-rate mortgage or loan, meaning the interest rate remains the same throughout the loan term.
Our example involves a $300,000 mortgage with a 10 percent down payment and a 15 percent fixed interest rate. Thus, you must enter 15 in the field for the interest rate.
Step 4: Enter the Amortization Term
Next, you must enter the amortization term, which is the length of time you’re supposed to repay your loan amount mortgage. Usually, it is 30 years for a mortgage. If you’re refinancing your loan or mortgage, the amortization term will be the number of years remaining on the loan.
For example, we used a 30-year amortization term to illustrate how to use our amortization calculator. The resultant amortization schedule will cover 30 years with monthly or yearly amounts.
Step 5: Enter the Payment Period
The payment period can be the same or different from the amortization term. If the same as the amortization period, you’ll repay your loan according to the original schedule. Otherwise, you can reduce the repayment period by several years.
In our example, the amortization term is 30 years. However, the payment period will is 15 years. That means the intention is to repay the loan in half its actual term. That work means preparing an amortization schedule to cover 15 years.
Step 6: Review the Results
If you have everything you need for the amortization calculator, it should take less than a minute to get the results. Check the results page to see the figures you’ll pay for the various items. The results section displays the:
- down payment amount
- monthly payment amount
- total monthly payments
- total paid per year
- balloon payment
- total paid at the end of the term
- And the total interest paid at the end of the term
The example above yields several results in each of these elements. With the figures used above, the down payment amount is $30; the monthly payment amount is $3,414; the total monthly payments 180; the total paid per year is $40,967.9a 9; the balloon payment is $243,929, the total amount paid at the end of this e term $858,448.79, total interest paid at the end of the term $588, 448.79.
What Is An Amortization Schedule
An amortization schedule or tablet table with details of each monthly or yearly payment for an amortizing loan. At the beginning of the loan period, a larger part of the payments goes to the interest component rather than the principal.
The mortgage amortization schedule will show a progressive reduction in interest with a corresponding increase in the principal. That continues until you pay off your mortgage at the end of the term.
An amortization table lists each mortgage payment and how it’s divided between the principal and interest. Besides, the schedule shows the principal and interest paid to date and the principal balance after every pay period.
A basic amortization schedule does not account for extra mortgage or loan payments. But you can still pay extra towards your loan if you want to complete it earlier. Plus, an amortization schedule will hardly reflect taxes and loan fees.
Key Uses of an Amortization Calculator
From the results section, our amortization calculator displays figures for several items. Thus, it’s not only useful in helping you amortize your mortgage but can also serve the following purposes:
- Principal Still Owed: The amortization calculator displays the amount of princess contained in a particular payment. It also displays the value of the principal you have paid at any time. Therefore, you can use the calculator to determine the amount of principal you still owe or will owe in the future.
- Value of Extra Payment: The amortization calculator shows your monthly payments if you reduce the payment period. By playing around with the payment period, you’ll know the extra payment you must introduce to clear your loan earlier.
- Interest Paid: The calculator also displays the amount of interest in any payment. It also shows the interest you have paid so far. Therefore, you can use it to determine the interest you paid in a particular year or at a particular stage of your mortgage.
- Equity on Your Home: An amortized loan involves a larger portion of the payment amount going to interest and a smaller portion to the principal at the beginning. Progressively, the interest reduces as the principal increases. So by checking how much of the principal you’ve paid so far, you can know the equity you have in your home.
What Next After Using the Amortization Calculator
Once you have gotten valuable information from the amortization calculator, for what do you use it? Of course, you must use devise how you’re going to pay off your loan or mortgage early enough. The following are some of the strategies you may adopt:
1. Refinancing Your Mortgage
Refinancing a mortgage can help you get a shorter loan term and a more affordable interest rate. However, refinancing may lead to significant amounts in closing charges. Therefore, you must evaluate whether the expected benefits are more than the upfront expenses.
2. Bi-Weekly Mortgage Payments
You may want to accelerate the mortgage payoff process through bi-weekly payments. That means making your payments every fortnight instead of monthly. The impact on your budget is minimal. With time, you’ll build your equity and save on interest.
3. Mortgage Recasting
Mortgage recasting involves preserving your existing loan by making a lump sum payment towards the principal amount. The lender then creates a new amortization table to reflect your current loan balance. Your interest rate and loan term remain the same even as your monthly payment decreases. It comes with a $200 to $300 fee and is cheaper than refinancing.
4. Home Loan Modification
If you’re experiencing financial hardship, you may opt for a home loan modification. Lenders use this option to ensure you are mortgage free faster. Loan modification also reduces the interest burden but can hurt your credit.