How loan amortisation works
An amortising loan has a fixed monthly payment, but the split inside that payment shifts every single month. Early on, most of what you send goes to interest. Late in the term, almost all of it goes to principal.
The reason is that interest is charged on the outstanding balance. In month one of a $350,000 mortgage at 6.5%, the interest charge alone is about $1,896 — while the total payment is roughly $2,212. Only $316 actually reduces what you owe. By the final year, that ratio has flipped almost completely.
The payment formula
The monthly payment is M = P × i / (1 − (1 + i)^−n), where P is the loan amount, i is the monthly interest rate (annual rate divided by 12), and n is the total number of monthly payments.
Note that i is the *periodic* rate. A 6.5% APR becomes 0.0054167 per month. Forgetting to divide by 12 is the most common mistake people make when checking this by hand.
Why extra payments are so effective
An extra payment applied to principal does not just reduce your balance by that amount — it eliminates every future interest charge that balance would have generated for the remaining term. A single extra $300 in year one of a 30-year mortgage removes roughly 29 years of compounding interest on that $300.
On a $350,000 loan at 6.5% over 30 years, the required payment is about $2,212. Adding $300 a month clears the loan in 261 months instead of 360 — eight years and three months early — and cuts total interest from roughly $446,000 to about $303,000. You paid an extra $78,000 to save $143,000. Try it in the calculator above.
Two practical cautions. First, confirm with your lender that extra payments are applied to principal and not held as a prepaid future instalment — you usually have to specify this. Second, check for prepayment penalties, which are rare on US mortgages but common on some auto and personal loans.
Should you pay extra, or invest instead?
Paying down a loan gives you a guaranteed, risk-free, tax-free return equal to the loan's interest rate. Investing offers a higher expected return with real risk of loss. The simple comparison is your loan rate against your realistic after-tax investment return.
At a 3% mortgage rate, investing usually wins on expected value. At 7%+, paying down the loan is very competitive and strictly less risky. In between it depends on your tax situation, whether you itemise mortgage interest, and how much you value the certainty. There is also a real behavioural argument for debt freedom that a spreadsheet cannot capture.
One near-universal exception: pay off high-interest consumer debt before doing anything else. A 22% credit card balance is a guaranteed 22% loss you can eliminate instantly.
What this calculator excludes
For a mortgage, your actual monthly bill will be higher than the figure shown. Lenders escrow property taxes, homeowners insurance, and — if your down payment was under 20% — private mortgage insurance. Together these commonly add 25–35% on top of principal and interest. HOA dues, where they apply, sit on top of that again.
This tool also assumes a fixed rate. Adjustable-rate loans reset on a schedule and require modelling each rate period separately.
Frequently asked questions
- Does this work for auto and personal loans?
- Yes. Any fixed-rate loan with equal monthly payments amortises the same way. Just enter the loan amount, APR, and term.
- Why is my lender's quoted payment higher than this?
- Mortgage payments usually bundle property tax, homeowners insurance, and sometimes PMI into escrow. This calculator shows principal and interest only.
- Is it better to make one extra payment a year or pay extra monthly?
- Monthly is slightly better because the principal reduction starts earning its keep sooner, but the difference is small. Consistency matters far more than timing.
- What is the difference between APR and interest rate?
- The interest rate is what accrues on your balance. APR also folds in origination fees and points, so it reflects the true cost of borrowing. Use the plain interest rate here to match your payment schedule.