Understanding Loan Amortization
An amortization schedule is a complete table of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term. While each periodic payment is the same amount early in the schedule, the majority of each payment is interest; later in the schedule, the majority of each payment covers the loan's principal.
How to Calculate Monthly Payment
The formula to calculate the monthly payment (M) for a fixed-rate loan is:
M = P [ i(1 + i)^n ] / [ (1 + i)^n – 1 ]
- M = Total monthly payment
- P = Principal loan amount
- i = Monthly interest rate (Annual Rate / 12)
- n = Number of payments over the loan's lifetime (Years × 12)
Tips for Getting a Lower Interest Rate
The interest rate significantly impacts your monthly payment and the total interest paid over the life of the loan. To secure a lower rate:
- Improve your credit score: Borrowers with higher credit scores represent lower risk to lenders and typically qualify for lower interest rates.
- Shorten the loan term: Shorter terms (e.g., 15 years vs 30 years) usually come with lower interest rates, though the monthly payment will be higher.
- Make a larger down payment: A larger down payment reduces the loan-to-value (LTV) ratio, which can help you secure a better rate.