What is a bond amortization calculator, and how does it work? We’ll use this article to teach you all about amortization and to explain why you need to get familiar with a bond amortization calculator if you are thinking about taking out a home loan.
Amortization is a big-sounding word but the principle behind it is actually very simple. Amortization is simply spreading the repayment of a loan out across a series of fixed payments. This includes the repayment of an auto loan, and of course the repayment of your mortgage. It can also be used in the accounting sense where amortization would broadly refer to spreading out costs over a period of time.
Used in connection with a loan, amortization works like this: the lender provides a lump sum in advance to, for example, pay for your home. In turn, you repay the loan by equal installments. Each installment consists out of a capital component, which repays the principal amount of the loan, and an interest component covering the interest accrued for that term.
Over time, each individual payment will pay more towards the capital and will have a smaller interest component. This is because as time lapses you repay the balance in ever increasing increments, and the interest accrued is therefore less. The very last payment in an amortization series will fully repay the loan.
The formula for a mortgage loan is simple, but the formula uses mathematical functions to perform its magic. Calculating the repayments in a mortgage loan uses a mathematical technique called a geometric series, which boils down to a simple formula when the math itself is simplified. This formula contains a variable for the loan amount, or principal, and variables for the interest rate and the term of the loan in months or years.
Calculating home loan repayments involves additional variables, as a home loan is a unique type of amortization, even though home loans follow general repayment principles. For starters, almost every home loan includes a down payment component. Next, home loans are denoted in years but repayments are monthly. You never hear of a 240 month home loan: it is a 20-year loan, repayable in 12 monthly installments each year.
Some calculators will go even further to better help you understand whether you can afford to repay a home loan. You might have the option to select between principal and interest, and interest only for repayments. A calculator could also allow for costs such as insurance, energy use, and taxes. The more variables a calculator includes the better your picture of the overall costs of home ownership.
To easily calculate repayments on a loan you need a calculator with an amortization formula built-in. You can do it with a normal calculator, but you need to know a bit about math and you will need to do a lot of writing out. You can buy a pocket financial calculator that can do it for you, or you can visit one of many websites that offer a free calculator.
You will find a free calculator at almost every major home loan vendor and these will make it easier to include factors such as down payments. There is a simple calculator on the Bank of America website for example. U.S. Bank also has a calculator which offers a neat result including a number of loan terms. There are plenty of independent calculators too but make sure you use a reliable website as you really don’t want to get the numbers wrong.
Another approach to working out your home loan repayment is to simply use a tool many of us already have: Microsoft Excel. With Excel, you can either use the built-in formula tool to set up your own calculator or download one of the many mortgage repayment spreadsheet templates which you can customize to your own needs. You won’t be able to customize an online calculator in the same way, for example.
Taking out a home loan is a big responsibility because, for most people, the amount borrowed is a large multiple of their annual income. Understanding how this amount will be repaid and how long it will take to repay it is therefore of top importance. Look at the output of an amortization calculator and consider the pace at which you are repaying the actual principal of the loan. This will show you at what stage you can expect to have repaid a sizeable portion of your loan.
Finally, the most important part: home loan calculators show you what your repayments will be in the first instance. You may have your sights on a dream home, along with a solid deposit, but if the repayments will stretch your budget, you should avoid plumping for a home loan. Calculators also help you to plan for the future, so that you know how to plan your personal finances and what size deposit you will save up for.