Amortization Formula Calculator

Amortization Formula:

\[ PMT = P \times \frac{r(1 + r)^n}{(1 + r)^n - 1} \]

Periodic Payment (PMT):

Unit Converter ▲

Unit Converter ▼

From:	To:

1. What is the Amortization Formula?

The amortization formula calculates the fixed periodic payment required to pay off a loan over a specified period, including both principal and interest components. It's commonly used for mortgages, car loans, and other installment loans.

2. How Does the Calculator Work?

The calculator uses the amortization formula:

\[ PMT = P \times \frac{r(1 + r)^n}{(1 + r)^n - 1} \]

Where:

\( PMT \) — Periodic payment amount
\( P \) — Principal loan amount
\( r \) — Periodic interest rate (annual rate divided by periods per year)
\( n \) — Total number of payments or periods

Explanation: The formula accounts for compound interest over the life of the loan, calculating a fixed payment that will pay off both principal and interest by the end of the term.

3. Importance of Amortization Calculation

Details: Understanding amortization helps borrowers see how much of each payment goes toward principal vs. interest, plan for long-term costs, and compare different loan options.

4. Using the Calculator

Tips: Enter the principal amount in dollars, annual interest rate as a percentage, and the total number of payment periods. All values must be positive numbers.

5. Frequently Asked Questions (FAQ)

Q1: What's the difference between amortization and simple interest?
A: Amortization accounts for compound interest and changing principal balance, while simple interest calculations assume the principal remains constant.

Q2: How does changing the payment period affect the payment amount?
A: Longer payment periods reduce the periodic payment but increase total interest paid. Shorter periods increase payments but reduce total interest.

Q3: Can this formula be used for monthly mortgage payments?
A: Yes, but remember to convert annual rate to monthly (divide by 12) and multiply years by 12 for total payments.

Q4: What's an amortization schedule?
A: A table showing each payment's breakdown between principal and interest, and the remaining balance after each payment.

Q5: Does this account for variable interest rates?
A: No, this formula assumes a fixed interest rate throughout the loan term.