How Loan Amortization Works
When you borrow money with a fixed-rate loan or mortgage, your monthly payment remains identical each month, but the internal allocation changes drastically over time. In the initial years, the majority of every dollar goes toward paying off accrued interest, while only a small slice reduces the loan balance.
As the remaining balance decreases, the monthly interest charge shrinks, allowing a larger percentage of subsequent payments to directly pay down the principal balance.
The Standard Amortization Formula
Where M = monthly payment, P = principal amount, r = monthly interest rate (annual rate ÷ 12), and n = total payments (years × 12).
Frequently Asked Questions
Does this calculation include property taxes or private mortgage insurance (PMI)?
This calculator computes pure principal and interest (P&I). Depending on your lender, your total escrow payment may also include local county property taxes, homeowner's insurance, and PMI if your down payment was under 20%.
How can I reduce the total interest paid?
Making extra payments toward the principal—even just \$100 extra per month or one additional lump-sum payment each year—significantly reduces total interest and cuts years off your mortgage.