Mortgage amortization is the process of gradually paying off a home loan through regular monthly payments that include both principal and interest. Each payment reduces your loan balance while building equity in your home. The amortization schedule shows exactly how each payment is split between principal reduction and interest charges, revealing the true cost of borrowing over time.
The Mathematics Behind Mortgage Payments
The standard mortgage payment formula is: P = L[c(1 + c)^n]/[(1 + c)^n - 1], where P is the monthly payment, L is the loan amount, c is the monthly interest rate (annual rate ÷ 12), and n is the total number of payments. This formula ensures that each payment is exactly the same amount, but the proportion going to principal vs. interest changes over time. Early payments are mostly interest, while later payments are mostly principal.
The Amortization Schedule Breakdown
An amortization schedule is a complete table showing every payment throughout the loan term. For each payment, it displays the payment number, payment amount, principal portion, interest portion, remaining balance, and total interest paid to date. This schedule reveals important patterns: the first few years see minimal principal reduction, while the final years show rapid equity building. Understanding this schedule helps borrowers make informed decisions about refinancing, extra payments, or loan modifications.
The Impact of Loan Terms and Interest Rates
Two critical factors dramatically affect your mortgage costs: the interest rate and loan term. A 1% difference in interest rate can save or cost tens of thousands of dollars over the life of a loan. Similarly, choosing a 15-year term instead of 30 years typically saves 40-50% in total interest, though it requires higher monthly payments. The calculator helps you visualize these trade-offs and make optimal financing decisions based on your financial situation and goals.