How To Use an Amortization Calculator

Amortization calculators are fun.  They can be used for a variety of different applications.  Want to know how much that car really is per month?  Use an amortization calculator.  Want to know what the difference in payment is for a 15 year mortgage or a 30 year mortgage?  Use an amortization calculator.  (Hint: it's not nearly as big a difference as you might think!)  Want to know how many years it will take you to pay something off?  Use an amortization calculator.   

To use an amortization calculator, you need some of the following pieces of information:  

  •       Payment
  •       Interest rate
  •       Term of the loan
  •       Principal amount 

If you have three of these pieces, you can solve for the fourth and also find out what the total cost of your purchase will be with principal and interest.  For example, if you know your payment, and you know your purchase price and the length of the loan, but the seller isn't really telling you what interest you'll be paying, you can use an amortization calculator to find out.   

An amortization calculator can be very beneficial when buying a car.  I know people who have been CONVINCED they knew the deal they were getting.  They KNEW they were getting a great interest rate and buying the car for a great price and even better, their monthly payments were really low!  When I asked them what the term was, they assured me it was a 5 year loan.  I plug in the numbers and assure them it's not a 5 year loan; it's a 7 year loan.  They have argued with me until they go back and read the loan documents again.  I have been right 100% of the time.  The calculator is so simple to use, but it can really save you from some big unwelcome surprises.   

Maybe you'd like to find out how much time you'll shave off of your mortgage term if you pay an extra $100.00 a month.  Easy to find out.  There is a slight catch here.  You will probably need an itemized mortgage statement to determine this.  Many people use their full monthly payment and add $100.00 to it.  However, your current monthly payment usually included insurance and taxes.  Look on your statement for just the interest and principle amount.  Add $100.00 to that amount.  Most statements also show the interest rate and the current remaining principle amount of the loan.  So there you have the three pieces, and now you can solve for the fourth - the term of the loan.   

There are all kinds of amortization calculators on the internet.  Since they all operate on basically the same principle, pretty much any will do.  You can check your car on a house calculator or vice versa.  There are even some inexpensive calculators that you can keep with you and will help you do the math.  They may have a few extra buttons, but they're not that hard to learn.   

An amortization calculator can be a real eye opener.  It's very helpful to help you plan your financial future.  You can really find out how best to save some money.  Find a calculator, play around with it, get comfortable with it and use it!


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