1. What is the Amortization Formula?

The amortization formula calculates the loan principal (PV) from known monthly payments (PMT), interest rate, and loan term. It's essential for understanding how much you can borrow based on what you can afford to pay monthly.

2. How Does the Calculator Work?

The calculator uses the amortization formula:

Where:

• \( PV \) — Loan principal (present value)
• \( PMT \) — Monthly payment amount
• \( r \) — Monthly interest rate (annual rate ÷ 12)
• \( n \) — Total number of payments (term in years × 12)

Explanation: The formula accounts for the time value of money, calculating how much principal would generate the specified payments at the given interest rate over the loan term.

3. Importance of Principal Calculation

Details: Knowing the maximum loan amount you can afford helps in budgeting and financial planning, especially when considering major purchases like homes or vehicles.

4. Using the Calculator

Tips: Enter your affordable monthly payment, annual interest rate (without % sign), and loan term in years. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: Does this include taxes and insurance?
A: No, this calculates only the principal and interest portion of payments. For complete budgeting, add property taxes and insurance separately.

Q2: How does interest rate affect the principal?
A: Higher interest rates reduce the amount you can borrow for the same payment, while lower rates increase borrowing capacity.

Q3: What's the difference between this and a regular loan calculator?
A: This works backward from payment to principal, while regular calculators determine payments from principal.

Q4: Are there limitations to this calculation?
A: It assumes fixed interest rates and equal monthly payments. Adjustable-rate loans would require more complex calculations.

Q5: How accurate is this for mortgage planning?
A: It provides a good estimate, but actual loan amounts may vary based on lender fees, credit score, and other factors.