Take one look at an amortization schedule and you discover that “simple interest amortization” is a misnomer.
Still, it’s not rocket science either. An amortization table shows you how quickly you’ll pay down your loan balance over the course of your loan term. And you use the same amortization schedule calculator for mortgage loans, auto loans, student loans, personal loans, or any other installment loan.
Here’s how it works — and a free loan calculator with amortization schedule.
What Is Amortization?
With a fixed-interest loan, your monthly payment remains the same for the entire life of the loan. But that doesn’t mean each payment puts the same amount toward paying down your principal balance.
At the beginning of your loan, the bulk of each monthly payment goes toward interest. Over time, that proportion changes, with more of your monthly payment gradually going toward principal and less toward interest. Here’s an example amortization chart showing how your principal payment and balance changes over the life of the loan:
Lenders structure loans this way so that they collect plenty of interest up front. Often, you don’t start really paying off your outstanding balance until the last few years of your loan. The better to profit off you, my dear.
It also incentivizes them to refinance you before your loan gets to that point. They get to charge you a bunch of fresh fees and closing costs, and restart your amortization schedule from scratch, with most of each monthly payment going toward interest again.
Banks keep pulling that same trick every five years or so, always trying to keep you in the initial high-interest phase of the loan. It’s why they offer to roll closing costs into your loan when they refinance you!
Home mortgage lenders do it, rental property lenders do it, car lenders do it, every lender does it. It’s the oldest trick in the book, and you shouldn’t fall for it.
How Is an Amortization Schedule Calculated?
In an amortization schedule calculator for mortgage loans, you enter the loan amount, interest rate, and repayment term. The amortization calculator then spits out your monthly payment amount, but more importantly, it lists every single monthly payment for the entire life of your loan.
For each payment in the amortization schedule, it shows you how much of the payment goes toward interest, how much toward principal, and your remaining principal balance.
An amortization calculator for extra payments also gives you the option to include extra each month, and pay down your loan faster. Our amortization schedule calculator below includes this option. It helps you figure out how much extra you’ll need to pay each month to, say, pay off your 30-year mortgage in 20 years.
If you’re a math nerd, here’s the formula to calculate the monthly payment of a fixed-rate loan:
The variables break down as follows:
M: The total monthly loan payment.
P: The original loan amount.
r: Monthly interest rate (the annual interest rate divided by 12, so a 6% interest rate would be .06 / 12 = .005.
n: Total number of payments over the loan term, so a 15-year mortgage would have 180 monthly payments.
Loan Calculator with Amortization Schedule
Enough with the foreplay already, where’s the amortization schedule calculator for mortgages?
Start fiddling and diddling until you’re satisfied:
Note: This mortgage calculator shows the monthly principal and interest payment, but doesn’t include mortgage insurance, homeowners insurance (or landlord insurance), property taxes, homeowners association fees, or other costs of owning a property.
As you can see, higher interest rates make a huge difference in how quickly you pay down your loan. The higher the interest rate, the longer you have to wait before seeing real progress in paying off your loan.
Unless, of course, you make extra mortgage payments.
How Extra Payments Change Your Amortization Schedule
Making additional payments can help you escape the early high-interest phase of your amortization table much faster.
For example, if you borrow a $200,000 loan at 7% interest for 30 years, and you pay just $100 extra each month, you can knock out the loan in around 24 years instead of 30. Instead of paying $279,016 in interest, you pay $215,709 — a savings of $63,307.
Play around with the amortization calculator with extra payments to get a sense for how quickly you can pay down your loan. For some creative ideas, read up on ways to pay down your mortgage faster (including one that won’t impact your budget).
Just make sure you don’t pay down your loan so fast that the lender hits you with a prepayment penalty! Check your mortgage terms to see if it comes with one.
Shorter Loan Terms, Less Total Interest
The shorter your loan term, the less total interest you’ll pay. Period.
Longer loans let your lender stuff more interest into the first half of the amortization schedule.
Use the amortization schedule calculator to run the numbers on just how much extra interest you’ll pay if you choose a 15-year mortgage versus a 30-year mortgage, for example. You probably won’t like what you see.
Sure, shorter loan terms mean higher monthly mortgage payments and lower real estate cash flow. But if you run the numbers with a rental cash flow calculator and find you can still end up in the black each month, it can save you a ton on interest in the long term.
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Whether you like what you see or not, here’s a word to the wise: don’t try to time the market. Interest rates could just as easily rise as fall, so holding out for lower interest rates might leave you stranded for years to come.
Of course, no one says you have to borrow money from a bank or mortgage lender. Try negotiating owner financing instead!
Alternatively, you can use revolving business lines of credit to fund your deals. Often they come with introductory 0% APR periods for the first 12-18 months. Check out this video explaining how it works.
A fixed monthly payment doesn’t mean that the same amount goes toward your principal balance each month. Expect to pay mostly interest at the beginning of your loan, and not make any real headway on paying down your balance until you near the end of it.
But that doesn’t mean you have to wait 30 years to pay off your mortgage loan. By making early payments, you can skip the worst of the initial interest. In fact, even making just one lump sum payment early in your amortization schedule can skip much of the early high-interest phase of your loan.
Play around with the amortization calculator for extra payments to see how quickly you can pay off your loan, and imagine how your cash flow will skyrocket once you pay off your mortgage.♦
Still have questions about mortgage amortization schedules or this loan amortization calculator? Wondering how your mortgage balance changes with one-time payments of extra funds? Fire questions at us below!
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About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.