Mortgage Amortization Calculator

Amortization schedule by year

Worked example

A $300,000 loan at 6.5% for 30 years has a principal and interest payment of $1,896 a month. Paid on schedule, the loan costs $382,633 in interest over 360 payments.

On the regular schedule, only $3,353 of the $22,754 you pay in the first year goes to principal. The other $19,401 is interest. That is how amortization works: early payments are mostly interest because the balance is at its highest.

Add $200 a month of extra principal and the loan is paid off in 23 years 1 month instead of 30 years. Total interest drops to $279,185, saving $103,449.

How mortgage amortization works

An amortizing loan has a fixed payment that covers both interest and principal. Each month, interest is charged on the remaining balance at one-twelfth of the annual rate. Whatever is left of the payment after interest reduces the balance. Because the balance shrinks every month, the interest portion shrinks too, and more of each payment goes to principal.

The payment is set so the balance reaches exactly zero on the last scheduled payment. The formula is P x r / (1 - (1 + r)^-n), where P is the loan amount, r is the monthly interest rate (annual rate divided by 12) and n is the number of monthly payments.

Reading the schedule

The table shows each year's total principal, total interest and the balance left at the end of the year. On a 30-year loan at a typical rate, interest is larger than principal for the first decade or more. The crossover point, where principal finally exceeds interest each month, comes later at higher rates.

For investors, the schedule matters in three places:

• Equity build-up. Principal paid each year is part of your total return even though it is not cash flow.
• Refinancing and selling. The balance at the end of year five or seven tells you what you would need to pay off.
• Taxes. Mortgage interest on a rental is generally deductible as an expense, while principal is not. Your accountant will want the interest figure for each year.

What extra payments do

Any amount paid above the scheduled payment goes straight to principal, which lowers the balance that next month's interest is charged on. The payment stays the same, so the loan simply ends sooner. Small amounts early in the loan have the biggest effect, because they remove principal that would otherwise collect interest for decades.

On a rental property, extra principal is not always the best use of cash. Every dollar sent to the lender is a dollar you cannot use for repairs, reserves or the next down payment, and it earns exactly the loan's interest rate. Compare that rate with what the money could earn elsewhere before you prepay. If you plan to refinance, as in the BRRRR method, prepaying the old loan may not help at all.

Rate and term trade-offs

A shorter term means a higher payment but much less total interest, and lenders often price 15-year loans lower than 30-year loans. A longer term keeps the payment down, which improves monthly cash flow and the debt service coverage ratio a lender will see. Many investors take the 30-year loan for the lower required payment and prepay when cash allows, which keeps the option to stop prepaying if money gets tight.

Try changing the term and rate above to compare. To see how the payment affects your return on a rental, run the same loan through the cash-on-cash return calculator.

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Results are estimates for education only, not financial, tax or legal advice. Check numbers with your lender and advisors before you buy.