Mortgage
Principal and interest

The most common way to repay a secured mortgage loan is to make regular payments toward the principal and interest over a set term, commonly referred to as (self) amortization in the U.S. and as a repayment mortgage in the UK. A mortgage is a form of annuity (from the perspective of the lender), and the calculation of the periodic payments is based on the time value of money formulas. Certain details may be specific to different locations: interest may be calculated on the basis of a 360-day year, for example; interest may be compounded daily, yearly, or semi-annually; prepayment penalties may apply; and other factors. There may be legal restrictions on certain matters, and consumer protection laws may specify or prohibit certain practices.

Depending on the size of the loan and the prevailing practice in the country the term may be short (10 years) or long (50 years plus). In the UK and U.S., 25 to 30 years is the usual maximum term (although shorter periods, such as 15-year mortgage loans, are common). Mortgage payments, which are typically made monthly, contain a repayment of the principal and an interest element. The amount going toward the principal in each payment varies throughout the term of the mortgage. In the early years the repayments are mostly interest. Towards the end of the mortgage, payments are mostly for principal. In this way, the payment amount determined at outset is calculated to ensure the loan is repaid at a specified date in the future. This gives borrowers assurance that by maintaining repayment the loan will be cleared at a specified date if the interest rate does not change. Some lenders and 3rd parties offer a bi-weekly mortgage payment program designed to accelerate the payoff of the loan. Similarly, a mortgage can be ended before its scheduled end by paying some or all of the remainder prematurely, called curtailment.

An amortization schedule is typically worked out taking the principal left at the end of each month, multiplying by the monthly rate and then subtracting the monthly payment. This is typically generated by an amortization calculator using the following formula:

A = P ⋅ r (1 + r) n (1 + r) n − 1 {\displaystyle A=P\cdot {\frac {r(1+r)^{n}}{(1+r)^{n}-1}}}

where:
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