Amortisation

Amortisation
Repayment of a mortgage loan through monthly installments of principal and interest. The monthly repayment amount is based on a schedule that will allow you to own your home at the end of a specific time period, (e.g. 15 or 30 years). Often referred to as the loan term.

Technically, amortization is the distribution  of a single lump-sum (the amount borrowed) into many smaller cash flow installments (monthly payments), as determined by an amortization schedule. Unlike other repayment models, each repayment installment consists of both principal and interest. Amortization is chiefly used in loan repayments (a common example being a mortgage loan) and in sinking funds. Payments are divided into equal amounts for the duration of the loan, making it the simplest repayment model. A greater amount of the payment is applied to interest at the beginning of the amortization schedule, while more money is applied to principal at the end.

The amortization calculator formula is:

P \,=\,A\cdot\frac{1-\left(\frac{1}{1+r}\right)^n}{r},

where: P is the principal amount borrowed, A is the periodic payment, r is the periodic interest rate divided by 100 (annual interest rate also divided by 12 in case of monthly installments), and n is the total number of payments (for a 30-year loan with monthly payments n = 30 × 12 = 360).