Mortgage Loan Amortization
Amortization is the process of accounting for an amount over a period of time. In a mortgage loan, amortization is used in calculating a loan repayment schedule. It is the distribution of a single lump-sum cash flow into many smaller cash flow installments. Each repayment installment consists of both principal and interest.
Payments are divided into equal amounts for the duration of the loan. A greater amount of the payment is applied to interest at the beginning of the amortization schedule, while more money is applied to principal at the end.
In other words, more interest is paid during the beginning period of the loan than at the end of the loan. Borrowers can shorten the life of the loan by paying extra principal with each payment.
Negative amortization (also called deferred interest) occurs if the payments made do not cover the interest due. The remaining interest owed is added to the outstanding loan balance, making it larger than the original loan amount.
Loan amortization calculator formula:
P = principal amount borrowed
A = periodic payment
r = periodic interest rate divided by 100 (annual interest rate also divided by 12 in case of monthly installments)
n = total number of payments (for a 30-year loan with monthly payments n = 30 × 12 = 360).