our everyday life

How to Figure Amortization of a Mortgage

by Tim Plaehn

A mortgage loan amortization table lists the mortgage balance, interest portion of the payment, principle portion of the payment and the total payment for each month of the loan term -- until the loan balance is paid off. With each monthly payment, a portion of the payment goes to principal, reducing the balance and amortizing the loan. With your payment amount and mortgage interest rate in hand, you can calculate the month-by-month amortization of your mortgage.

Gather the following facts about your mortgage: the original loan amount, the monthly principal and interest payment and the interest rate. To show how the amortization works, an example 30-year loan with an initial amount of $240,000; interest rate of 5.5 percent and a monthly payment of $1,362.69 will be used.

Divide the interest rate by 12 to get a monthly rate. Mortgage interest is determined monthly, based on the outstanding loan balance. For the example loan, 5.5 percent divided by 12 equals 0.45833 percent or 0.0045833 if you prefer to use the decimal form.

Multiply the loan balance by the monthly interest rate. To start amortizing the example mortgage multiply 0.0045833 times $240,000 to equal $1,100. This is the interest amount for the first payment of the loan.

Subtract the calculated interest for the month from the monthly payment to get the amount of principal going to pay down the loan. In the example, the payment of $1,362.69 minus $1,100 gives $262.69 of principal reduction.

Subtract the principal payment from the loan balance to get the new loan balance after the upcoming payment has been paid. On the example loan, after the first payment the loan balance will be $239,737.31.

Continue calculating the monthly interest, principal and new loan balance for each of the mortgage payments. On the example loan for the second payment you should get: Interest: $1,098.80 Principal: $263.89 Loan Balance: $239,473.42

Tips

  • If your amortization calculations are working correctly, you will pay a little less interest with each payment and a bit more principal to reduce the balance.
  • You can build an amortization schedule with a calculator, pencil and several pieces of paper. Another way to see how a loan amortizes is to use a spreadsheet program and set up rows, columns, and some math calculations. An extra principal payment reduces the loan balance, which is used to calculate the interest and principal for the next monthly payment.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

Photo Credits

  • Digital Vision./Digital Vision/Getty Images