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What is amortization?

Amortization is a means of paying out a predetermined sum (the principal) plus interest over a fixed period of time, so that the principal is completely eliminated by the end of the term. This would be trivial if interest weren't involved, since one could simply divide the principal amount into a certain number of payments and be done with it. The trick is to find the right payment amount, which includes some principal and some interest. The math isn't celestial mechanics, but beyond the capabilities of the basic pocket calculator. For the curious, there's a mathematical presentation of the problem and its solution.

This calculator assumes that each payment should be the same amount, and that a payment consists of some amount for principal reduction and the interest calculated on the principal balance (including the principal part of the current payment). I have been told that some Canadian mortgages are not calculated using this method (anyone wanna give me some details?).

Amortization is used most often in mortgages (at least in the United States) and short-term loans, but the technique can also be applied to figure out how long it would take to pay off a given credit card debt (for example). In fact, this latter application was why I wrote the calculator in the first place.

Anticipated Amount of House
Amount of Down Payment $
Anticipated Interest Rate(.00 format)

Anticipated length of loan, in years.

Start Date of Loan (month and year)
House Price $
Down Payment $
Monthly Payment $
# of years
Month/Year Interest Principal

Calculator Assumptions

Use this form to calculate the periodic repayment of borrowed principal and interest incurred for a given time period and interest rate. The assumption of this calculator is that the regular payments (consisting of principal and interest) are equal, and that the first installment is due one payment interval after the borrowing date. There may be one balloon payment which is assumed to occur one payment interval after the final regular payment. (Exempli gratia, a one-year loan repaid in monthly installments and a final balloon payment would consist of 11 regular payments and one balloon payment.) The balloon payment also consists of principal and interest parts.

If you request an amortization schedule be shown, you can see how the principal and interest vary from payment to payment. There may be small discrepancies between the amortization schedule and the summarized calculations above the schedule. In calculating the schedule, principal and interest parts are rounded to the nearest penny, while the summary calculations above the schedule come directly from the analytic equation for amortization that I derived. Your lending institution may use a different method of handling fractional pennies. The final payment (or balloon payment) of the amortization schedule is adjusted (up or down) so that the debt is liquidated entirely.

If you are buying real estate, be sure that the loan amount (principal) is sale price of the property less the down payment. For example, property with a sale price of $100,000 which you might buy with 10% down ($10,000) would require a loan of $90,000.

Nota Bene: The payment amount for this calculator will only include principal and interest. But it doesn't stop there if you are trying to determine what your monthly payment will be when buying real estate. In addition to P&I, other money may be collected regularly by the bank or mortgage company to meet future payments of property taxes, mortgage insurance, homeowner's insurance, or other fees. This escrow payment is added on top of the monthly P&I, and is usually independent of the terms of the loan. Depending on the bank, you may be assessed a one-time escrow management fee at closing.

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