Mortgage Amortization Calculator 2023

What is Amortization and the Amortization Schedule?

When you buy a home using a mortgage, you will have to pay back the lender in periodic installments known as mortgage payments. Amortization is the process of repaying a loan by making equal periodic payments that are used to pay both the principal of the loan and the accrued interest. Amortizing loans have a fixed end date and the amortization schedule shows how the mortgage amount reduces over time as more payments are made.

The most commonly used amortization for mortgages is the 30-year fixed-rate loan, however, other options such as a 15-year mortgage can also be amortized. Apart from conventional home loans, Jumbo Home Loans and adjustable-rate mortgages that follow a benchmark index like the Prime Rate , which is based on the FED Funds Rate, are also amortized.

The amortization schedule is a table that provides the breakdown of the mortgage payment into its components, principal, and interest paid over the life of the loan. Initially, a greater proportion of the monthly payment goes towards interest payments, and towards the end of the loan, a larger proportion of principal is paid.

What Information does the Amortization Schedule Provide?

The amortization schedule provides important information that can help borrowers better understand their mortgage. The following information is provided:

1. The proportion of your mortgage payments that go towards principal or interest - The amortization schedule will show you how much principal and interest make up every mortgage payment.
2. Total principal and interest paid during the mortgage - This will allow you to compare between different mortgage terms or payment plans.
3. The remaining amount of unpaid principal at a particular date - You will be able to see how much you still owe on the house and how much you own.
4. Reduction in the time of the mortgage if extra payments are made. - If you want to repay your mortgage earlier, an amortization schedule can show you what extra payments you need to make.
5. Comparison between mortgages with different terms such as 30-year and 15-year
6. The estimated date when 20% home equity is acquired and Private Mortgage Insurance (PMI) can be removed.

Calculator Inputs and Outputs Explained

Mortgage Amount - Depending on the amount you have borrowed, your monthly payments and respective principal and interest paid will be determined. A bigger mortgage amount means that you will have to make higher monthly payments.

Amortization Length - The number of years throughout which you will pay off the loan. A shorter amortization length will lead to higher monthly payments but less total interest paid.

Interest Rate - This rate will determine the interest you will end up paying throughout the life of the loan, which will in turn affect the monthly payments.

Monthly Mortgage Payment - The amount you will have to pay each month in order to pay off the mortgage completely by the end of the term.

Total Cost - The principal and interest you will pay throughout the entire life of the loan. This can be calculated by multiplying the monthly mortgage payments with the amortization length in months.

Total Principal - The total principal you will pay will be the mortgage amount that you borrowed initially.

Total Interest - The amount of interest you will pay during the life of the loan. The mortgage rate plays an important role in determining how much the total interest will be.

How do I calculate my Mortgage Amortization?

In order to calculate the mortgage amortization and subsequent amortization schedule, the following mathematical formula is used:

For example, suppose that the loan amount is $300,000, the mortgage rate is 2% and the term is 30 years. Follow these steps to find the monthly mortgage payments:

Step 1: Convert the given mortgage rate to a monthly rate by dividing it by 12.

Step 2: Convert the mortgage term from years into months to find n.

Step 3: Input the monthly rate as r, the mortgage term in months as n, and the loan amount as P, in the equation to find the monthly mortgage payment.

How does the Principal and Interest Repayment Change over the Life of the Loan?

The mortgage amortization table is structured from the mortgage amount, mortgage rate, and the monthly mortgage payment. In each payment period, the interest is calculated by multiplying the remaining balance on the loan with the mortgage rate. The principal paid is the remaining amount of the mortgage payment after interest has been subtracted.

As time progresses the amount paid towards principal and interest changes. Initially, more interest is paid from the mortgage payment , but as more payments are paid and the loan balance decreases, a larger proportion of principal is repaid. The key formula to keep in mind is Monthly Mortgage Payment = Principal + Interest for a specific period. For example:

The above table provides a snapshot of the amortization schedule at the starting, halfway, and final point of the mortgage. Initially, a greater proportion of the monthly mortgage payment goes towards interest ($500), towards the end of the loan more principal ($1,107) is repaid.

How does an amortization schedule work?

With fixed-rate mortgages, you are required to pay back the loan plus interest in equal periodic installments. Depending on the term of your loan, the mortgage rate, and the size of the loan you have borrowed, your monthly payments will be determined.

These monthly payments consist of the principal, which is the original money that you borrowed, and interest, which is what the lender is charging you for giving you the loan. While you make equal payments each month, there is a difference in how much of that payment consists of principal and how much consists of interest, from month to month.

The interest charged depends on the outstanding principal balance of the loan. Therefore, in the first month, when your principal balance is high, the interest charged will be high as well. On the other hand, during the last few months, you will have paid off most of the principal that you borrowed. This means that the interest charged will be low since the mortgage rate will be multiplied by a lower principal balance amount.

How does an extra payment affect the amortization schedule?

In order to pay off their mortgage earlier, some people choose to make extra payments on their mortgage. This typically happens when the lender doesn’t have any prepayment penalties. If the sum paid is large enough, the procedure is called Mortgage Recasting. The extra payments are applied towards the principal balance of the mortgage, which means that your balance will decrease faster than it would if you just made your required payments.

The interest you pay on the first month of your mortgage would stay the same since the initial balance is still $200,000. However, in the months following that the interest would be lower, since now the balance decreases even further from the extra payments. Therefore, the monthly mortgage rate times the lower principal balance leads to lower interest.

Besides paying less in interest, by making extra payments, you would also be able to retire your mortgage earlier. This happens because the principal will decrease faster, so it will take less time for you to pay off everything that you owe.

Longer vs Shorter Amortised Loans

Amortised loans have different total costs when they are amortized over a longer vs shorter period of time. Generally, the longer the amortization period, the smaller the monthly mortgage payment, but more interest is paid over the entire mortgage term. Homeowners struggling with their mortgage payments in pre-foreclosure and facing foreclosure may even be able to extend their mortgage term to 40 years. This reduces their monthly mortgage payments while they get their finances back in order. Similarly, the smaller amortization period, the larger the monthly payments, but with a lower total interest expense.

For example, a $500,000 loan with a fixed mortgage rate of 3%, with either a 30-year mortgage or a shorter 15-year mortgage will have the following summary information:

The 30-year mortgage has a smaller monthly payment of $1,345 as compared to the 15-year mortgage because it is spread across a longer period of time. However, for the same $500,000 home with a mortgage rate of 3% the total interest paid is $137,364 larger for the 30-year mortgage as compared to the 15-year mortgage. Therefore, loans with longer amortizations generally cost more in total as more interest is paid over the life of the loan.

How is an Amortized Loan Different from a Non-Amortized Loan?

Fixed-rate amortized loans have equal repayments consisting of principal and interest. Non-amortizing loans are structured differently, in the beginning only interest is paid, towards the end large lump-sum payments have to be made to pay back the principal. The differences between an amortized loan and non-amortized loans are summarised below.

1. Fixed-rate amortized loans have equal periodic payments that consist of repayment of principal and interest at the same time. Adjustable-rate mortgages may not have equal monthly mortgage payments as they are linked to a benchmark index like the Prime Rate which is linked to the FED Funds Rate. For non-amortized loans, payments are unequal as principal and interest are not paid simultaneously.
2. Amortized loan payments consist of both principal and interest which vary through the life of the loan, initially higher interest is paid from the monthly payment, whereas towards the end, a higher principal is paid. Non-amortized loans have interest-only payments initially, whereas, towards the end of the loan lump-sum payments are made to cover the principal.
3. As both principal and interest are paid simultaneously, it results in higher monthly mortgage payments as compared to non-amortized payments which are interest only. You can use an interest-only mortgage calculator to estimate your payment schedule for your mortgage.
4. Amortised loans have principal repayments from the start, hence, the borrower gains equity in the home from the beginning. Whereas, in non-amortized loans, the borrower does not get any equity from the start.
5. Home mortgages such as conventional loans, FHA Home Loans , VA Home Loan, and USDA Loans along with auto loans are all structured as fully-amortizing loans with amortization schedules. Credit cards and HELOCs are non-amortizing loans as they do not have structured periodic payments and only require minimum interest payments.

Are Mortgage Payments Tax Deductible?

Only the interest payments on the mortgage can be claimed as an itemized deduction, not the principal repayments. Interest paid on mortgages up to $750,000 can be claimed in tax deductibles by itemizing on your tax returns, any interest paid on an amount greater than $750,000 cannot be claimed. If the home was purchased prior to December 15, 2017, interest on the debt of up to $1,000,000 could be itemized, as the limit was higher. The 2017 Tax Cuts and Jobs Act resulted in deductions on interest to be limited to $750,000.

Check your total income tax using our income tax calculator.