How to Calculate Mortgage Interest Amortization

Home ownership is typically the biggest investment for most people. Your amortization schedule in your loan documents shows the true cost of your home purchase. The total interest paid, your mortgage term and periodic interest rate, the number of payments, as well as your monthly payment amount are all listed here. Even your monthly payments are broken down, showing the total interest and principal paid out for each payment. Knowing how to calculate your amortization schedule can help you to see how effective extra principal payments can be in decreasing your mortgage term and interest paid.

Things You'll Need

• Amortization schedule

Instructions

1. Obtain your amortization schedule within your loan documents. Get the loan amount, the periodic interest rate and the monthly payment amount from the amortization table. You will need these to calculate your mortgage interest amortization.

2. Multiply the loan amount by your periodic interest rate, as this will be the amount of interest paid in your monthly payment. There is an inverse relationship here between interest and principal. Larger interest payments means less equity growth, while larger principal payments means more equity growth. This is why equity is harder to build in the beginning at easier to build at the end of a loan.

3. Take your monthly payment amount and subtract from it the interest payment. The remainder of the monthly amount is what will go towards your principal balance (the loan amount).

4. Subtract the principal payment amount from the loan amount. Repeat steps two through 3 to determine the interest and principal payout for your next monthly payment.

5. Consider making extra principal payments whenever you can. Your amortization schedule should have a sample table demonstrating the effectiveness of just one extra loan payment made a year; you take off years off your mortgage term and in the process save a lot of money from decreasing your interest paid out.

Tips & Warnings

• Utilize the free online amortization calculators. You can quickly create your own amortization tables to see how different prepayment scenarios affect your loan.

• Be sure, however, to check your loan documents about principal prepayment before making any additional payments. Some mortgage companies will fine you for prepaying.

Resources

• Loan amortization calculator
• Benefits of Prepaying Mortgages
• For Mortgages, Paying Extra Doesn't Always Pay Off