What Is Loan Amortization?
Loan amortization is the process of paying off a debt through regular, scheduled payments. Each payment covers the interest that has accrued since the last payment, then uses the remainder to reduce the principal balance. Early in the loan, the vast majority of each payment goes to interest. Over time, as the principal decreases, a larger share of each payment reduces the balance. By the final payment, nearly the entire amount is principal.
How the Monthly Payment Is Calculated
M = P × [r(1+r)^n] / [(1+r)^n − 1]
P = loan amount · r = monthly rate (annual rate ÷ 12) · n = total payments (years × 12)
For example, a $300,000 loan at 7% for 30 years: r = 0.07/12 ≈ 0.005833, n = 360. Monthly payment ≈ $1,996. Total paid = $718,560. Total interest = $418,560 — more than the loan itself.
Also see the Mortgage Calculator which includes property taxes, insurance, and PMI in the payment breakdown.
How to Read an Amortization Schedule
Each row in the amortization table shows one monthly payment broken into:
- Payment: Fixed monthly amount (except possibly the last payment)
- Principal: Amount that reduces your loan balance (shown in green)
- Interest: Cost of borrowing for that month (shown in red)
- Balance: Remaining loan balance after this payment
Frequently Asked Questions
What is loan amortization?
Loan amortization is the process of paying off a debt through regular scheduled payments. Each payment is split between interest (what the lender earns) and principal (what reduces your balance). Early payments are mostly interest; later payments are mostly principal. An amortization schedule shows exactly how much goes where for every month of the loan.
How is the monthly payment calculated?
Monthly payment = P × [r(1+r)^n] / [(1+r)^n − 1], where P is the principal, r is the monthly interest rate (annual rate ÷ 12), and n is the total number of payments. This formula produces a fixed payment that pays off the loan in exactly n months.
How much interest can I save by paying extra each month?
Extra payments reduce your principal directly, shrinking future interest charges. On a $300,000 30-year mortgage at 7%, an extra $200/month saves approximately $69,000 in interest and pays off the loan 5 years early. See our Mortgage Calculator for home-loan specific scenarios including extra payment modeling.
What is the difference between a fixed-rate and adjustable-rate loan?
A fixed-rate loan has the same interest rate for the entire term — your payment never changes. An adjustable-rate mortgage (ARM) starts with a fixed period then adjusts periodically based on a benchmark rate. ARMs often have lower initial rates but carry risk if rates rise. This calculator models fixed-rate loans.
Does bi-weekly payment reduce total interest paid?
Yes. Making half your monthly payment every two weeks results in 26 half-payments per year — equivalent to 13 full monthly payments instead of 12. That one extra payment per year can cut a 30-year mortgage by 4–5 years and save tens of thousands in interest.
When does it make sense to refinance a loan?
Refinancing makes sense when you can get a meaningfully lower rate (typically 0.75%+ lower), plan to keep the loan long enough to recoup closing costs (usually 2–3 years), and your credit and equity qualify. Break-even: divide closing costs by monthly savings to find how many months before you come out ahead.
Why does the final payment sometimes differ slightly?
Rounding to the nearest cent each month creates tiny discrepancies that accumulate. The final payment is adjusted to pay off the exact remaining balance, so it may be a few cents different from the standard monthly payment. This calculator adjusts the last payment for precision.