1. What is the Amortization Formula?

The amortization formula calculates the fixed monthly payment required to pay off a loan over a specified term, including both principal and interest. It's the standard calculation used by banks and lenders to determine mortgage payments.

2. How Does the Calculator Work?

The calculator uses the amortization formula:

Where:

• \( P \) — Principal loan amount (USD)
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( n \) — Number of payments (loan term in years × 12)
• \( PMT \) — Monthly payment amount

Explanation: The formula accounts for the time value of money, calculating equal payments that cover both interest and principal reduction over the loan term.

3. Importance of Loan Amortization

Details: Understanding amortization helps borrowers see how much of each payment goes toward principal vs. interest, plan for refinancing, and evaluate different loan options.

4. Using the Calculator

Tips: Enter the principal amount in USD, annual interest rate as a percentage (e.g., 3.5 for 3.5%), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between interest rate and APR?
A: The interest rate is the cost of borrowing the principal, while APR includes additional fees and costs to give a more complete picture of loan costs.

Q2: How does a longer loan term affect payments?
A: Longer terms reduce monthly payments but increase total interest paid over the life of the loan.

Q3: What is an amortization schedule?
A: A table showing each payment's breakdown between principal and interest, and the remaining balance after each payment.

Q4: How do extra payments affect amortization?
A: Extra payments reduce principal faster, shortening the loan term and reducing total interest paid.

Q5: Are property taxes and insurance included?
A: No, this calculator shows only principal and interest. Actual mortgage payments may include escrow for taxes and insurance.