When you’re doing the math on a potential mortgage, one of the most important numbers that you’ll come across is your monthly mortgage payment. This consists of the combination of principal and interest that you need to make each month to satisfy the mortgage obligation during the agreed amortization period. What an amortization calculator shows you is the breakdown of each payment (how much goes to interest and how much goes to principal). You’ll also get the total interest that you are paying over the life of the loan, as well as the total cost of the loan.

## Loan Amortization Calculations

Here’s how it works. Let’s say you are looking at purchasing a $900,000 home. You have $200,000 to put down, so you are asking the bank to finance $700,000 for you. Your amortization period is 25 years, and the interest rate (at least for the first mortgage you’ll take out) is 4 percent. Entering those figures into a mortgage calculator gives you a monthly payment of $3,695. Over 25 years, you’ll be making 300 (25 x 12) monthly payments of that amount, unless the interest rate changes at renewal.

Now, if you enter those figures into an amortization schedule, you’ll see slightly different principal amounts over the course of the loan. Your payment will still be $3,695, but different portions of that total will go to interest and principal each month. If you scan down the schedule, you’ll see that the principal amount slowly grows while the interest amount slowly decreases.

Here’s why. Each month, the amortization calculates the amount of interest due on the remaining principal and subtracts it from your payment amount. The remainder goes to principal. The calculation goes like this: your first payment is on a principal of $700,000, due on the 1st of the month. Calculate the interest by multiplying the interest rate by 1/12 and then by the balance on the loan. In this case, it would be 1/12 x 0.04 x 700,000, or $2,333.33. Subtracting that from the payment amount ($3,695.00) gives you a principal payment of $1,361.67.

So in Month 2, you have a new principal of $698,638.33 ($700,000 – $1,361.67). So your interest amount will be slightly smaller because your principal balance has shrunk a bit. Your new interest portion is $2,328.79. You’ll still make that same payment of $3,695, but now a little bit more will go to principal ($1,366.21). Your new principal for Month 3 will now be $697,272.12.

It might not look like you’re making much progress, but you are. As interest keeps going down, principal will keep going up. If you can make some extra principal payments, you’ll see payments disappearing from the end of your schedule as you are not borrowing as much money any more. This calculator can help you figure out how much you’re spending on interest — and how much you’re helping yourself by piling on those extra principal payments.