Plain-English breakdowns of loan amortization, mortgage payments, interest compounding, and practical borrowing formulas.
A standard fixed-rate mortgage payment is calculated using the original loan principal, the monthly interest rate, and the total number of monthly payments across the loan term. The standard formula sets a fixed monthly amount that pays off all accrued interest while gradually reducing the remaining loan balance to exactly zero by the final payment.
Annual Percentage Rate (APR) reflects the simple annual cost of borrowing without accounting for interest compounding within the year. Annual Percentage Yield (APY), also known as the effective annual rate, includes the effect of compounding interest. Whenever interest compounds more than once a year, APY is strictly higher than APR.
Compound interest is interest calculated on both the original principal and on interest already earned in prior periods. Because each period's interest gets added back into the balance, the balance grows faster than it would under simple interest, where interest is only ever calculated on the original principal.
Amortization is the process of paying off a loan through a series of fixed payments, where each payment covers that period's interest first, and whatever is left over reduces the principal balance. Because interest is charged on the remaining balance, and the balance is highest at the start, early payments are mostly interest and later payments are mostly principal — even though the payment amount itself never changes.