Do I need the detail of an amortization calculator?

Posted by  on Oct 26, 2012

Q: I'm looking into buying a house for the first time, and I'm confused by the different kinds of mortgage calculators. I'm comfortable with a simple loan calculator where I put in the amount borrowed and interest rate, and it tells me what my monthly payments would be. I see there are also amortization calculators which give me more detailed output, but since it ultimately adds up to the same payment results, do I need the extra details?

A: Those details can be very helpful. An amortization calculator breaks your monthly payments down into principal and interest components, and shows you how quickly you will pay down the principal on your loan. This can be useful for a couple reasons:

  1. Seeing the interest rate component tells you how much of your payment could change if interest rates were to rise or fall, which can help you decide whether to opt for an adjustable- or fixed-rate mortgage, and it could also help you decide whether to buy now or wait another year.
  2. Seeing the principal component helps you see how quickly you will pay down your loan. You know that a 30-year loan will take 30 years to pay off, but you may not appreciate how slowly equity builds in the early part of the loan. In the beginning, when your loan balance is highest, interest makes up the lion's share of your monthly payments. The opposite is true later in the loan.
    Seeing the rate at which principal will be paid down on an amortization calculator illustrates why it can be dangerous to repeatedly roll over debt -- it means you are always paying the part of the loan which is more interest than principal, so you build equity more slowly.

In short, a simple mortgage calculator will answer the question, "Can I afford this house?" However, a more detailed amortization calculator may help you manage your borrowing decisions more successfully now and in the future.

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