Amortization

Understanding Amortization

With an amortizing loan, such as a typical mortgage or car loan, each payment is the same, but the split changes over time. Early payments are mostly interest; later payments are mostly principal.

An amortization schedule lists every payment and how much goes to interest and principal. Extra payments toward principal shorten the loan and cut total interest.

Formula

Here, $M$ is the monthly payment, $P$ the loan amount, $r$ the monthly interest rate, and $n$ the number of payments.

Example

A $400,000 loan at 6.5% for 30 years has a monthly payment of about $2,528.27.