Amortization Calculator

Amortization is an interesting concept and one that a lot of people really are not aware of. In order to understand exactly how a mortgage amortization calculator can help you, it is important first of all to make sure that the term amortization is easily defined. Now, if you go by the dictionary definition, they basically just say that amortization is the “act of amortizing”, which is perhaps one of the most useless definitions to ever hit the books of the dictionary. Therefore, let us spend a few moments defining the concept of amortization before discussing the calculators that use it.

Amortization, simply put, is the process of assigning premium and interest payments into one payment rather than splitting them out into two separate payments. In other words, when you are amortizing payments, you are combining all of the different aspects of the same payment into one without offering the client the breakdown of those payments. Banks and other financial institutions do this all the time in any sort of loans they give out and ultimately people don’t really know what part of the payment that they make goes to interest and what part of the payment goes to paying back the actual premium. In all cases, amortization starts out with a higher percentage of the payment going to interest and a lower percentage going to principle. As the principle shrinks, so does the interest and therefore larger chunks of the same amount of monthly payments can go towards reducing the actual interest.

This is best served through the use of an example. If you have a premium of $100,000 borrowed from a bank with an annual interest rate of 8%, chances are you can get the bank to agree for you to pay that amount back over a 30-year period should you so choose. Under these circumstances, your payment amount each month would be $733.76 which in the first month would be a $67.09/$666.67 split between the premium and the interest and in the last month would be a $728.86/$4.90 split instead. The idea here is that at first you are paying down the interest with those same monthly payments, but once the principle shrinks the interest goes along with it and therefore a larger percentage of the payment can go towards paying down the principal amount.

So where do amortization calculators come in?  Well, what they do quite simply is they allow you to calculate everything that you need to know about amortization schedules based on simply inputting a few pieces of information. For example, a typical online calculator will get you to input the amount being borrowed, the annual interest rate, the number of payments each year and the total number of payments. This in turn will allow the calculator to figure out what the interest is each year and therefore cross reference that interest rate with the monthly payments you will then have to make. It is an impressive piece of software that can do all that and that is ultimately why mortgage amortization calculators are so effective.