What amortization means
Amortization is the process of repaying a loan over time with fixed payments. Each payment includes interest on the outstanding principal and a principal repayment component.
Monthly payment formula (fixed-rate)
Payment = P * r * (1 + r)^n / ((1 + r)^n - 1), where P is principal, r is the monthly rate (APR/12), and n is number of monthly payments (years * 12).
Why early payments are interest-heavy
Interest is calculated on the remaining balance. Early on, the balance is high, so interest is high. Over time, as principal decreases, the interest portion falls and principal repayment increases.
What changes over time (amortization schedule intuition)
| Early months | Middle months | Late months |
|---|---|---|
| High interest, low principal | More balanced split | Low interest, high principal |
How to use this calculator
- Compare terms: longer term lowers monthly payment but increases total interest.
- Compare rates: small APR changes can have large payment impact over long terms.
- Use scenarios for refinance decisions (include fees separately).
Extra payments and refinancing (what to consider)
- Extra principal payments reduce the balance faster, reducing total interest and often shortening term.
- Refinancing can lower APR or term, but fees and reset timing matter (compare total cost).
- For adjustable-rate loans, amortization may change when the rate resets; model scenarios.
Common mistakes
- Mixing APR with other fees and calling it the full monthly cost (taxes/insurance/PMI are separate).
- Comparing loans with different compounding or fee structures without total-cost modeling.
- Assuming the payment is 'mostly principal' early on (it usually is not).