A mortgage amortization formula allows an individual or business to determine the amount of money it will take to repay a loan. Loans require principal repayments along with a specific amount of interest, with payments normally made on a monthly basis. Many different types of formulas are available for this process, though calculators made available on Internet websites can do the trick better than using a written formula. Individuals often use a mortgage amortization formula to determine how long it will take to repay their home mortgage loans. Specific data is necessary to complete this formula properly.
The basic start to a mortgage amortization formula begins with the principal amount borrowed from a lender. Other pieces of this puzzle include the annual interest rate for the loan and the number of years the loan is for, with 15 or 30 being the most common for mortgages, though other lengths are possible for different loan types. Multiplying the loan principal by the annual interest, divided by one minus the interest rate, plus one raised to the power of minus N years — this is a technical formula that completes the process for determining the monthly payment of a mortgage. The result contains both the monthly principal and interest payments.
The base formula listed above reports only the data for a standard monthly payment to repay the entire loan amount for the given number of loan years. Individuals can make additional payments in an attempt to lower the loan’s principal balance in a shorter time period. Formulas for this process are a bit more technical, though an individual can use the formula mentioned above to complete the process. In order to complete this properly, changing the principal balance as part of the original formula results in a different monthly payment. The monthly payment will be slightly lower than the original as longer mortgage periods — such as 15 and 30 years — will not experience substantial drops in monthly payments unless an individual makes large, extra payments.
Online mortgage calculators complete the entire mortgage amortization formula behind the scenes. An individual simply needs to input data into a few different fields, namely mortgage principal, annual interest rate, loan length, and other data, if necessary. Clicking a button on the website page presents a principal and interest amount — usually as a monthly payment — that will be close to the answer using a standard mortgage amortization formula. Financial calculators can also do the same thing, though the data needed is input using a different formula.