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The amortization calculator provides an amortization schedule, or your monthly or bi-weekly mortgage payments with a breakdown between principal and interest. . The following information is required to calculate your mortgage payments: mortgage amount, length of the mortgage, and your mortgage rate.
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:
- The proportion of your mortgage payments that go towards principal or interest
- Total principal and interest paid during the mortgage
- The remaining amount of unpaid principal at a particular date
- Reduction in the time of the mortgage if extra payments are made.
- Comparison between mortgages with different terms such as 30-year and 15-year
- The estimated date when 20% home equity is acquired and Private Mortgage Insurance (PMI) can be removed.
How do I Calculate the Mortgage Amortization?
In order to calculate the mortgage amortization and subsequent amortization schedule, the following mathematical formula is used:
M = Monthly Mortgage Payment
P = Principal Mortgage Amount
r = Mortgage Rate (monthly)
n = Term of Mortgage (months)
For example, if the loan amount is $300,000, the mortgage rate is 2% and the term is 30 years, the monthly mortgage payment is calculated by first converting the mortgage rate into a monthly rate of 0.16% (2%/12) and mortgage term of 30 years into months, 360 (30*12). The following information is inputted into the formula giving a monthly mortgage payment of $1,109.
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:
|1 – First Payment||$1,109||$500||$609 ($1,109 - $500)|
|180 – Halfway||$1,109||$288||$821 ($1,109 - $288)|
|360 – Last Payment||$1,109||$2||$1,107 ($1,109 - $2)|
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.
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. Similarly, smaller amortization period, larger monthly payments, but 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:
|Mortgage Term||Monthly Mortgage Payment||Total Principal Paid||Total Interest Paid|
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.
|No||Amortized Loan||Non-Amortized Loan|
|1||Equal payments (fixed-rate)||Unequal payments|
|2||Principal + Interest||Initially interest only|
|3||Higher monthly amount||Lower monthly amount|
|4||Equity ownership from the start||No equity ownership initially|
|5||E.g. – Home mortgages, auto loans||E.g. – Credit cards, HELOC|
- 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.
- 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.
- 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.
- 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.
- 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.