Find out how much interest you will pay over the life of a loan

How much interest will you pay on your loan or a mortgage? An amortization calculator will tell you how much. Does it matter? If you know you have to pay $600 a month, isn’t that enough to know? Yes.

It does matter, because the amortization calculator will show you that after one year you own almost none of your house. If you sell it, you will have to pay the full loan back. If the housing market was going badly, and you didn’t get what you sold your house for, you might find you did not have enough money to buy the new house you want. This situation can also affect you when you retire.

If you are young, you probably think you are doing well buying a house because it will be a good investment, and will provide the basis of your retirement investments. Usually, that is so, but if the housing market goes through a lean time – usually when interest rates are high – you may find it is not such a good retirement investment.

The amortization calculator will show you just how much you are borrowing, and how much you are paying back, and how much interest you are paying each month. It will also show how much better off you are if you take out a loan for a shorter than the normal period.

Consider a loan of $100,000 and the results shown by the amortization calculator, which you can find in many places on the internet. If you take out a 20-year loan at 5.5% interest, you will pay about $687 a month in repayments – if you are borrowing $200,000, just double the numbers, or put them into the amortization calculator.

In the first month, you will pay $458 in interest, and only pay $230 off the loan. If the loan lasts 25 years, the amortization calculator will show that you pay less each month, but the interest takes up a bigger chunk – And it is to get lower total payments each month that people go for the longer term loans.

Our amortization calculator shows that with a 25 year loan, you will pay $155 back to the lender, but still $458 in interest to start with.

After five years, the payments on the 20 year loan will be:
Interest $380 Repayment of loan $307
After 10 years:
Interest $282 Repayment of loan $404

By contrast, with the 25 year loan the figures are:
After 5 years:
Interest $405 Repayment of loan $208
After 10 years:
Interest $340 Repayment of loan $275

So you can see that after 5 years, the person who took out the shorter loan is paying off an extra $100 of the loan each month. If you sell after this period, you will owe only $61,400 on the 20 year loan, against $73,700 on the 25 year loan – so the amortization calculator shows that when you come to buy your next home, you will be able to buy a more expensive one, or get a smaller loan.

The amortization calculator is a useful tool which shows a lot of information you will want to know about your loan, and this could well affect your retirement income. For example, how much will you have to pay for the privilege of borrowing $100,000 over 20 years? $65,000 – in other words, you borrow $100,000 and pay back $165,000.

By contrast, the amortization calculator shows that you would have to pay back $84,000 – total repayments total $184,000. Of course, with higher interest rates you will pay more. For example, at 7% - which you can expect sometime during the period of the loan - $112,000 with a 25 year loan. This means that you will pay off very little interest in the first few years.

These interest payments could have an influence on your ability to build a decent pension income, and the amortization calculator will let you see the best way forward.