There are two primary financial pieces that make up the repayment equation on a home loan: principal, or the amount borrowed, and interest, or the fee you are charged for borrowing on a loan. Amortization is the process of paying off these debts in installments over a period of time.
Initially, the majority of your monthly payment goes towards paying off the interest on a loan. With regular payments, eventually, the amount that goes towards paying off interest decreases on fixed-rate loans. This makes it possible for a larger portion of your monthly payment applicable to paying off the principal balance on a loan.
Using an amortization calculator is a helpful financial tool that can be utilized to clarify the relationship between how much interest you owe compared to how much principal remains to be paid on a loan. From there, homeowners can determine how long it will take to repay their own and come up with a plan of action that will put them in a better position financially.
What is an Amortization Calculator?
Amortization calculators are also known as amortization schedule calculators. They use specific inputs to create a table that details how much of your monthly payment is applied towards the interest on your loan versus the remaining principal balance on your loan. The formula used to determine this looks like this:
Let’s break down these inputs in simpler terms to understand how amortization is calculated.
M. This variable represents your total monthly mortgage payment. It is composed of principal, interest, taxes, and insurance.
P. This variable represents the principal amount you owe on a loan. The principal is the amount a homeowner borrows from a lender. Reducing the principal by making extra payments will cause the results found by an amortization calculator to shift in favor of the homeowner’s ability to reduce the rates and terms on their loan.
r. This variable represents your monthly interest rate. It is set by your lender annually. The monthly rate is calculated by dividing the total amount for the year by 12 since there are 12 months in a year. For example, if your interest rate for the year is at 4%, the amount you pay each month is 0.00333333333 (.04/12 =0.00333333333).
n. This variable represents the number of payments made over the life of your loan. Loan terms are typically set in increments of 15 or 30 years. So, for a 15-year loan term, this figure is calculated by multiplying the number of years in your loan term, 15, by the number of monthly payments in a year, 12. We multiply 12 x 15, which brings you to a total of 180 monthly payments made over the life of the loan. To determine the amount for a 30-year mortgage term, you can simply double this amount to get 360 monthly payments (12 x 30 = 360 or 2 x 15 x 12 = 360).
Calculating your principal balance and interest rate with an amortization calculator is a meaningful tool that breaks down what is included in your monthly payments. Homeowners should be aware that amortization calculators do not include all of the costs that affect your monthly payment. Homeowners insurance, private mortgage insurance, property taxes, and other fees will also affect how your monthly housing expenses are calculated.
How Can Calculating Amortization Help Homeowners with Their Monthly Payments?
Using a mortgage amortization schedule allows homeowners to keep track of how much they have left to pay on their mortgage and understand how much they’re paying toward interest. Tracking these numbers can help homeowners make informed decisions that will put them in a better position financially. From deciding whether or not to refinance for a lower rate or make extra payments to chop off the end of your mortgage loan, this tool is a great resource to use when creating a financial plan of action. Knowing how much you’ve paid on a loan can also help you determine how much built-in equity you’ve accumulated.
How Do Extra Payments Affect Your Amortization Schedule?
Making extra payments can help homeowners save money by shortening the life of the loan, thus reducing the amount of interest paid. You should discuss with your lender if there is a fee for paying off your mortgage earlier than the set term. Specify to your lender that you want extra payments to be applied to the principal on the loan. Otherwise, those additional payments will be applied to paying off the interest on your loan.
This is critical to keep in mind since interest is compounded. This means that the interest paid in your monthly payments is determined by the total amount owed (principal plus interest). By focusing on lowering the principal, the compounding interest rate has less to feed off of, which will ultimately put you in a better position financially. Homeowners can work towards this goal by paying a little more each month. One of the best ways to determine this amount is by paying enough each month that it adds up to a “13th mortgage payment,” or in a lump sum payment.
How Can The Home Loan Expert Help?
The Home Loan Expert is a team of professional, friendly lending experts who by virtue of its representation, reflect the same communities we serve. Our ability to expand nationwide was made possible by operating from a customer-centric platform that is dedicated to assisting homeowners to get the best deal possible on a loan. We provide personalized, face-to-face customer service to ensure that the needs of our clients are heard and seen.
Using an amortization calculator is one tool in a home owners repertoire of calculating monthly payments. Consulting with our team of welcoming, neighborly lending experts is a sure way to communicate your financial goals when it comes to creating a monthly payment plan that best suits your financial needs. Call us today at (866) 221-1926 to find out more about how your amortization schedule affects your monthly payments. We can also be reached through our online chat service at any time.