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Calculating Payments with the Mortgage Amortization Calculator





How the Mortgage Amortization Calculator works

The mortgage which you obtained for the purchase or refinance of your home is known as a “direct reduction” loan. This means that a portion of every payment you make will be applied toward the direct reduction of the principal balance outstanding.

In the case of a fixed rate loan, your monthly payment for principal and interest will remain fixed for the entire term of your loan. For example, if you borrowed $200,000 at an interest rate of five percent (5%) for a term of thirty years, your monthly payment would be $1,073.64 for principal and interest. After making this payment every month for this entire term, your loan would be completely paid off.

When you make your monthly payment it is divided into interest and principal portions. The payment is first allocated to monthly interest and the remainder is allocated to principal reduction. Using our example of $200,000 at 5% interest for thirty years, the first month’s payment would be divided at $833.33 toward interest and the remainder of 240.31 toward principal reduction. Your new outstanding principal amount due after applying the payment would be $199,759.69 ($200,000-$240.31).

Your second month’s payment would be allocated at $832.33 toward interest and $241.31 toward principal. Your new principal balance at the end of the second month would be $199,518.38.

For illustration purposes let’s look at the third month. Your monthly payment is still $1,073.64, divided as follows: $831.33 for interest and $242.31 toward principal reduction. Your new outstanding principal balance is now $199,276.07.

You will notice that the portion of your payment allocated to interest is decreasing every month while the portion allocated toward principal is increasing every month. This happens because your monthly interest payment is calculated on the outstanding balance due on your loan at the end of the previous month. As this balance decreases every month so does your monthly interest cost. Since your payment stays the same every month, more of each subsequent month’s payment will be allocated to principal.

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