Amortization is the repayment of a loan, such as a mortgage, with intervallic payments consisting of principal as well as interest calculated to repay the loan at the conclusion of a predetermined period of time.

Before you reach for that bottle of aspirin, let’s try a longer but simpler explanation. Imagine that you buy the home of your dreams. Like most homebuyers, you put a down payment on the home, and take out a mortgage in order to pay for the rest. A mortgage, or home loan, is basically a pledged agreement between you and your lender (usually the bank) that allows you to live in a home and claim it as “yours” provided you make regular payments to your lender, plus interest, until you have paid off what you owe. Your payments are usually a percentage of the principal (the initial amount you borrowed) plus interest. With every payment you make, the home becomes that much more “yours.” Until you have paid off everything, your lender technically “owns” whatever percentage of your home you have left to pay off.

Now imagine that you and your lender have worked out a specific period of time after which you want the home to be all yours. Typically, this period is about thirty years. At the end of this period, you will have paid off everything you owe. This means you will have paid back the principal, along with any interest you have incurred along the way. This period is called the amortization period. In order to ensure you have paid off everything by the specified time, you must first work out your monthly payments, including all the interest you will collect during the life of your mortgage.

We know what you’re probably thinking. You’re wishing you’d reached for the Aspirin after all, because math and calculations give you a headache. Fortunately, you won’t have to work this out on your own. We all know that the Internet is full of all kinds of historic and scientific information, wonderful for helping your kids out with their Ancient Civilizations or Biology homework. What you may not know yet is that the Internet is becoming an increasingly popular place for adults to do their math homework, too. So, rather than sit down with a pencil, eraser, notebook and your solar-powered calculator with the Memory function you just can’t figure out how to use, simply find an online Amortization Calculator to help you plan your repayment schedule.

Many online amortization calculators assume that you will be making regular payments of principal and interest throughout the life of the mortgage. They also assume that your first payment is due one payment interval after the borrowing date. Some calculators also assume one balloon payment, which typically occurs one payment interval after the last regular payment.

There may be one balloon payment that is assumed to occur one payment interval after the final regular payment. This balloon payment is also made up of principal and interest parts.

Also, keep in mind that whenever exact calculations are done, you might end up with things like fractions of pennies—which, obviously, you cannot pay or be charged. The online amortization calculators you use may employ a different method of dealing with fractions of pennies than your lender. For example, the amortization calculator may round up, while your lender may round down. For this reason, the amount you actually pay may be slightly different than what your online amortization calculator shows. Nevertheless, the amortization calculator can give you a very good idea of how much you’ll have to pay, and when.

Finally, keep in mind that the balloon payment may be adjusted so that the debt is cleared up completely.

When you type the loan amount, or principal, into the calculator, make sure that

you type in only the amount you actually borrowed, not the amount your home actually cost. In other words, type in the sale price of the home minus the down payment. If your home cost $200,000, and you put down $20, 000 as a down payment and took out a mortgage of $180,000, then type $180,000 into the “loan amount” field. If you type in $200, 000, then the numbers that come up will not match what you actually owe. You’ll end up paying more every month than you’re supposed to!

Typically, an amortization calculator will have the following fields:

In this field, write in the amount that you originally borrowed. This amount is called the principal, or loan amount. Do not add any interest to this amount. This is the amount that should be paid off in full by the end of the amortization period.

This is the annual interest rate you will be charged. In a fixed-rate mortgage, the interest rate will be the same every year. The value in this field is divided by the Payments per Year to get an episodic interest rate to be utlizied in the amortization calculations.

You may have guessed what this one is just based on the title alone. If you are required to make monthly payments, then you would put the number 12 in this field. This is because you will be paying one payment each month, every month of the year. As there are 12 months, you will be making 12 payments. If, however, you’re on a twice a month schedule, then you would put the number 24 in this field instead. This is because you will be making two payments in each of the 12 months.

For those of you who are on a bi-weekly schedule, there’s a catch: do not put the number 24 in this field. Put the number 26 instead. You’re probably thinking “There are 12 months, and each month is approximately 4 weeks long, so if I’m paying bi-weekly, I should technically only pay twice a month.” Well, not exactly. If you are going by weeks, then it doesn’t really matter how many months are in the year. Lenders who deal with bi-weekly payments don’t want to have to refer to that “Thirty days has September/April, June and November” rhyme every time payment day approaches, nor do they want to worry about leap years, so they ignore the idea of months and go by number of weeks instead. You may remember from grade school that there are 52 weeks in a year. If you are required to make bi-weekly payments, then you divide this number in half and get 26. So, instead of 24, you should put 26 in the “Payments per Year” field.

This field will want to know the total number of regular payments you’ll make throughout the entire life of the loan. What you do in this field is multiply the number of payments per year by the number of years that make up the amortization period. For example, if the amortization period is 30 years and you’re making bi-weekly payments, then you would multiply 30 by 26 and end up with 780. Thus, 780 is the amount you would enter in this field. The “Calculator” tool in your Start menu and/or your trusty solar-powered hand-held calculator can help you ensure that you’re entering the right number into this field.

This is an optional field. Some amortization calculators have it; others don’t. Usually, loans are designed so that there remains a lump sum to be paid at the end of the term. Most of this lump sum consists of principal, but some of it might be interest as well. This amount is often called the “balloon” payment. If your loan works this way, then you can enter the amount of that lump or “balloon” payment in the field. The calculator will not include this amount when calculating your regular payments. If you leave this field blank, the calculator will assume that you have not arranged to have a lump amount at the end of your loan.

This is the number you’ve been waiting for: the amount you’ll have to pay at regular intervals throughout the life of your loan. Based on the information you have entered in the fields described above, the online amortization calculator will calculate how much you will have to pay at each regular payment interval.

Once you have filled in all the above fields, click on the “Calculate” button. The amortization calculator will calculate how much you should pay at each regular payment date in order to have the entire loan paid off by the end of the amortization period.

Note that most online amortization calculators prefer that you use Arabic numerals, as opposed to Roman numerals, words, or any other form of expressing numeric value. As well, plenty of online amortization calculators do not require that you put in a dollar sign ($) in front of the number.

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