Amortization Calculator

An amortization calculator allows you to schedule and manage your mortgage payments. These are available in many websites and they are free. These calculators will allow you to estimate your loan repayments. These calculators can also determine the amount that goes to the interest and the principal.

How These Calculators Work

The setup and options may vary somewhat, but their basic functions
are the same. First select the appropriate credit profile (poor, fair, good or excellent). Next, enter the loan amount (example $150,000).

Enter the interest rate (example: 6%). Choose the loan term (i.e., x number of years). Now pick the start date. Choose what year you want the results to appear. Click calculate.

Note: not all amortization calculators have a credit profile option. If it is there, you must specify the standing correctly. Not doing so will affect the results.

Doing the Calculations Manually

By amortizing a loan payment you can pay off the interest and the principal. If you want to do it manually, here is how it is done.

Step 1

Change the monthly interest into decimal. Divide the interest by 12 x 100. This will get you the right value (J). Write it.

Step 2

Calculate the months you prefer the loan amortized (N). This is the loan duration multiplied by 12.

Step 3

Determine the denominator of the monthly payment formula (M). Get the J figure and add 1 to it. Calculate this to the minus N power. Take away 1 from this figure. This is the denominator for the payment amount.

Step 4

Compute the monthly payment (M). Divide J using the denominator of the payment amount. Multiply it by the principal. The result is the monthly payment.

Step 5

To calculate the interest (H), multiply the principal (P) by the interest you pay monthly (J).

Step 6

To calculate the monthly payment (C), subtract the monthly interest (H) from the principal amount (M).

Step 7

To get the loan principal balance (Q), remove the monthly principal payment (C) from the principal (P).

Step 8

To set up the principal to the current balance (P and Q respectively), repeat steps 5 to 7. Keep repeating until the amount gets to zero. That is the payment schedule.

Understanding Amortization

Amortization refers to the way the monthly payments of a mortgage are done. It will help you better understand how an amortization calculator works. The PITI refers to the principal, the taxes, insurance and finance.

The insurance and taxes are gathered by the servicer and paid to the parties involved. The interest and principal go to the lender.

The fixed rate mortgage is determined via a level payment, usually 15 to 30 years. Most of the early P and I are usually paid to the interest. Later on, most of the payment is for the principal.

Although you can figure out the amortization manually, it is much easier if you use an amortization calculator. It will remove a lot of the complexities involved. Just make sure the figures are all correct.