What an amortization schedule shows
Amortization is paying off a loan in equal installments. Each payment covers that month's interest first, and the rest pays down the balance. Because interest is charged on the balance still owed, early payments are mostly interest and later ones are mostly principal, even though the payment never changes.
Example: a $300,000 mortgage at 6.5% for 30 years has a payment of $1,896.20. The first payment is $1,625.00 interest and $271.20 principal. Over 360 payments you pay $382,633.47 in interest, more than the amount borrowed.
What extra payments save
Extra money goes straight to principal, so every later month is charged interest on a smaller balance. The savings compound: the earlier you pay, the more you save.
- $200 extra a month on that $300,000 loan pays it off in 277 payments instead of 360, almost 7 years early, and saves $103,448.79 in interest.
- $2,000 extra once a year pays it off in 289 payments and saves $87,371.62.
- One extra payment a year, often done by paying half the payment every two weeks (26 half-payments make 13 full ones), has a similar effect.
Before paying extra, check that your loan has no prepayment penalty, and ask your lender to apply the money to principal rather than to next month's payment.
Frequently asked questions
How do I calculate an amortization schedule?
Work out the fixed payment with the formula above. Then, for each month, multiply the balance by the monthly rate to get the interest, subtract it from the payment to get the principal, and subtract the principal from the balance. Repeat until the balance reaches zero.
Why is so much of my early payment interest?
Interest is charged on what you still owe, and at the start you owe the most. On a 30-year mortgage at 6.5%, the first payment is about 86% interest. Principal doesn't overtake interest until payment 233, in year 20.
Is it better to pay extra monthly or once a year?
Monthly saves slightly more, because the money starts cutting interest sooner. $2,400 a year paid as $200 a month saves more than one $2,400 payment at the end of the year, but both save a lot.
Can I use this for a car loan or personal loan?
Yes. Any fixed-rate loan with equal monthly payments amortizes the same way. For a mortgage payment that includes tax and insurance, use the mortgage calculator.
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