Amortization Calculator

What is an amortized loan? - Amortization definition

An amortized loan is a type of loan where the borrower repays the principal and interest through regular, fixed payments over a specified period. In the context of real estate, this means that each payment contributes to both the loan's interest and the principal amount, gradually reducing the balance until the loan is fully paid off.

For real estate investors, understanding amortization is crucial because it impacts cash flow, the total interest paid over the life of the loan, and the overall return on investment.

What is the amortization formula?

The amortization formula calculates the fixed monthly payment needed to repay the loan. The formula is:

A = P [r(1+r)^n] / [(1+r)^n - 1]

where:

• A — Monthly payment amount;
• P — Principal loan amount;
• r — Monthly interest rate (annual rate divided by 12); and
• n — Total number of payments (loan term in years multiplied by 12).

This formula ensures that each payment is the same amount, with varying portions going towards interest and principal over time.

Amortization calculator with extra payments

Using an amortization calculator with the option to include extra payments can help real estate investors understand how additional payments can reduce the loan term and total interest paid. Here's how you can use it:

1. Enter the principal loan amount (e.g. $200,000).
2. Input the annual interest rate (e.g. 4%).
3. Set the loan term in years (e.g. 30 years).
4. Add any extra monthly payments you plan to make (e.g. $200).

The calculator will show the adjusted loan term and total interest savings. For example:

Original Monthly Payment: $954.83
Extra Monthly Payment: $200
New Monthly Payment: $1,154.83
Original Loan Term: 30 years
New Loan Term: 24 years
Total Interest Saved: $34,123.45

By making extra payments, you can pay off the loan faster and save a significant amount of money on interest.