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. This formula is fundamental to loan calculations and mortgage planning.

2. How Does the Calculator Work?

The calculator uses the amortization formula:

Where:

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

Explanation: The formula accounts for compound interest over the life of the loan, ensuring each payment covers both interest and principal reduction.

3. Importance of Amortization Calculation

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

4. Using the Calculator

Tips: Enter the principal amount in USD, annual interest rate as a percentage, 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, while APR includes fees and other loan costs, giving a more complete picture of loan expenses.

Q2: How does loan term affect payments?
A: Longer terms reduce monthly payments but increase total interest paid. Shorter terms have higher payments but lower total interest.

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 does extra principal payment affect the loan?
A: Extra payments reduce the principal faster, decreasing total interest and potentially shortening the loan term.

Q5: Are there loans that don't amortize?
A: Yes, interest-only loans and balloon loans have different payment structures that don't fully amortize over the term.