Calculate your loan amortization schedule and see how each payment is split between principal and interest
Loan amortization is the process of paying off a debt over time through regular payments. Each payment consists of two parts: principal (the amount borrowed) and interest (the cost of borrowing). Early in the loan term, most of your payment goes toward interest. As time progresses, more of each payment goes toward reducing the principal balance.
An amortization schedule shows you exactly how each payment is allocated between principal and interest, helping you understand the true cost of your loan and how your balance decreases over time.
Your monthly payment is calculated using the loan amount, interest rate, and loan term. This payment remains constant throughout the loan (for fixed-rate loans), but the split between principal and interest changes with each payment.
Each month, interest is calculated on your remaining balance. Early payments have higher interest portions because the balance is larger. As you pay down the principal, the interest portion decreases.
The principal portion is what remains after subtracting the interest from your monthly payment. This amount directly reduces your loan balance. As interest decreases over time, the principal portion increases.
Making extra payments toward principal can significantly reduce your total interest paid and shorten your loan term. Extra payments go directly to reducing the principal balance, which means less interest accrues in future months.
In the first years of your loan, the majority of each payment goes toward interest. For a 30-year mortgage at 6% interest, approximately 75-80% of your first payment is interest. This is why you build equity slowly at first.
Around the midpoint of your loan term, payments become more balanced between principal and interest. This is when you start building equity at a faster pace.
In the last years of your loan, most of each payment goes toward principal. By the final payment, nearly 100% goes to principal with minimal interest. This is when equity builds most rapidly.
Interest is calculated on your remaining balance. Since your balance is highest at the beginning, the interest portion is also highest. As you pay down the principal, less interest accrues each month.
Extra payments can save substantial amounts. For example, paying an extra $100/month on a $300,000 30-year mortgage at 6% can save over $60,000 in interest and pay off the loan 5 years early.
This depends on your interest rate and investment returns. If your loan rate is higher than expected investment returns (after taxes), paying extra on the loan is often better. Consider your risk tolerance and financial goals.
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