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Amortization
Loan amortization refers to the way that periodic payments are
structured to pay off a loan.
Amortized payments are determined by dividing the amount owed (the
principal) by the number of payment periods (usually months)
remaining. Then, interest is added. Each payment reduces both the
principal and the interest.
In most amortized home loans, the early loan payments are used mainly
to pay off the interest. It may take more than half the
life of the loan before the interest and principal portions of the loan
payment are equal. The final loan payments are used mainly to
pay off the principal.
A loan amortization schedule shows how each loan
payment is used to pay off interest and principal. It may also
show the unpaid principal at any point in time.
| Tip |
To see how an amortization schedule is used to solve a real-world mortgage problem,
read the
discount points
sample problem.
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All of the mortgage calculators on this website generate an
amortization schedule showing all the standard outputs (principal, interest,
unpaid balance). In addition, however, they show a very useful "extra" output -
they show how total mortgage cost changes across payment periods.