Amortization Calculator
See how your loan payments are applied to principal and interest over time, and discover the impact of extra payments.
Amortization Calculator
Loan Details
Additional Options
Understanding Amortization
Amortization refers to the process of paying off a debt (typically a mortgage or other loan) through regular payments over time. Each payment is divided between paying interest and reducing the principal balance.
How Amortization Works
With an amortizing loan, your monthly payment stays the same over the life of the loan, but the way it's divided between principal and interest changes:
- Early in the loan: A larger portion of each payment goes toward interest
- Later in the loan: More of each payment goes toward reducing the principal
- Final payment: Pays off the remaining balance completely
The Amortization Formula
The monthly payment for an amortizing loan is calculated using this formula:
Payment = P × r × (1 + r)ⁿ ÷ [(1 + r)ⁿ - 1]
Where:
P = Principal (loan amount)
r = Monthly interest rate (annual rate ÷ 12, expressed as a decimal)
n = Total number of payments (loan term in years × 12)
Interest vs. Principal
Interest Payments
- Calculated as: Current balance × (Annual rate ÷ 12)
- Highest in the early years of the loan
- Gradually decrease over time
- May be tax-deductible (consult a tax professional)
Principal Payments
- Calculated as: Monthly payment - Interest
- Builds equity in your home or asset
- Increases with each payment
- Accelerates toward the end of the loan term
Smart Amortization Strategies
Understanding your amortization schedule opens up opportunities to save money and pay off your loan faster:
Making Extra Payments
One of the most powerful strategies for saving on interest and reducing your loan term is making extra payments.
Impact of Extra Payments
Here's what happens when you make extra payments toward principal:
- Reduces principal faster: Each extra dollar goes entirely to reducing principal
- Decreases future interest: Since interest is calculated on the remaining balance, less principal means less interest
- Shortens loan term: You'll pay off your loan earlier than scheduled
- Front-loaded benefits: Extra payments made early in the loan term have the greatest impact
Extra Payment Strategies
Monthly Extra Payments
- Add a fixed amount to your regular monthly payment
- Consistent approach with predictable results
- Even small amounts ($50-100) make a big difference
- Easiest to automate with your lender
Biweekly Payments
- Pay half your monthly amount every two weeks
- Results in 26 half-payments (13 full payments) per year
- One extra payment annually without feeling the pinch
- Aligns well with biweekly pay schedules
Lump Sum Payments
- Apply tax refunds, bonuses, or windfalls to your principal
- Makes a significant immediate impact
- Reduces interest calculated on future payments
- Flexibility to make when funds are available
Important Note
Before making extra payments, check with your lender about:
- Prepayment penalties that might apply
- Proper procedures to ensure payments are applied to principal
- Options to recast your loan (re-amortize after a large principal payment)
Actionable Steps to Optimize Your Loan
Create an amortization schedule
Use our calculator to generate a personalized amortization schedule for your loan. Understanding exactly how your payments are divided between principal and interest is the first step to making informed decisions.
Determine your extra payment budget
Review your monthly budget to identify how much extra you can comfortably put toward your loan. Remember that consistency is more important than amount—regular small extra payments add up significantly over time.
Set up automated extra payments
Contact your loan servicer to arrange automatic extra payments. Specify that these additional funds should be applied to principal only. Automation ensures you won't forget and removes the temptation to skip payments.
Review your loan statements regularly
Check each monthly statement to confirm that extra payments are being properly applied to principal. If you notice any discrepancies, contact your lender immediately to correct the issue.
Reassess your strategy annually
As your financial situation changes, revisit your amortization schedule and payment strategy. You may be able to increase your extra payments over time, or you might need to adjust if circumstances become more challenging.
Frequently Asked Questions
What's the difference between amortization and depreciation?
While both involve spreading costs over time, amortization typically refers to paying off debt in regular installments, while depreciation refers to allocating the cost of a tangible asset over its useful life. Amortization can also refer to spreading intangible asset costs, but in the context of loans, it means the gradual repayment of debt through scheduled payments.
Why do I pay so much interest at the beginning of my loan?
In a standard amortizing loan, interest is calculated based on the outstanding principal balance. Since the balance is highest at the beginning of the loan, more of your payment goes toward interest. As you gradually pay down the principal, the interest portion decreases and more of each payment goes toward principal reduction.
Can I change my amortization schedule?
Yes, there are several ways to modify your effective amortization schedule. Making extra principal payments is the most common method, which reduces the loan term and total interest. Refinancing to a different term or interest rate will create an entirely new amortization schedule. Some lenders also offer loan recasting, which recalculates your payment after a substantial principal reduction.
Are all loans amortizing loans?
No, not all loans use amortization. Examples of non-amortizing loans include interest-only loans (where you only pay interest for a period, with the principal due later), balloon loans (smaller payments with a large final payment), and revolving credit (like credit cards) where the payment varies based on the balance.
How do extra payments affect my amortization schedule?
Extra payments that are applied to principal immediately reduce your loan balance, which means less interest accrues going forward. This effectively shortens your loan term and reduces the total interest paid. The impact is greatest when extra payments are made early in the loan term when the principal balance is highest.
Related Calculators
Mortgage Calculator
Calculate your monthly mortgage payment, including principal, interest, taxes, and insurance.
Refinance Calculator
Determine if refinancing your mortgage makes financial sense and how much you could save.
Home Equity Calculator
Determine your home equity and how much you might be able to borrow with a home equity loan or HELOC.