Initially, most of your payment goes toward the interest rather than the principal. The downside is that you’ll spend more on interest and will need more time to reduce the principal balance, so you will build equity in your home more slowly.

With a longer amortization period, your monthly payment will be lower, since there’s more time to repay. Over the course of the loan, you’ll start to have a higher percentage of the payment going towards the principal and a lower percentage of the payment going towards interest. If you take out a fixed-rate mortgage, you’ll repay the loan in equal installments, but nonetheless, the amount that goes towards the principal and the amount that goes towards interest will differ each time you make a payment. Over the course of the loan term, the portion that you pay towards principal and interest will vary according to an amortization schedule. Fun, huh? And, of course, the bank earns more interest on that, too.Each month, your mortgage payment goes towards paying off the amount you borrowed, plus interest, in addition to homeowners insurance and property taxes. What really happens during the loan is that payments are not usually posted on Saturday or Sunday, so the actual loan amortization gets skewed to the following Monday or post-holiday Tuesday. Actual days between scheduled payment dates are based on the actual days in each monthly period (31 in January, 28 in February except 29 in a leap year, etc. The only way to know for sure is to lay out a line-by-line table of the calculation in each period. That adjusted rate may give you the same payment if you use Excel's 30/360 formula.

I would guess that the algorithm calculates the total actual days in the loan term, divided by the total of the nominal 360 days in each year, times the nominal interest rate. The algorithm factors in the 366-day leap years during the scheduled loan term.

In truth, the fully amortizing payment is a little more complex, because To calculate interest, the bank uses that daily rate based on a 360-day year, times the principal balance since the previous payment, times the actual number of days elapsed since the previous payment date.

When interest accrues over 365 days, this daily rate produces a bit more than 6.00% interest income for the bank. When banks use Actual/360, it means that interest for each day is based on the nominal rate (e.g., 6.00%) divided by 360 days. Many banks use an 'Actual/360' formula to calculate payments, while Excel's pmt function and your financial calculator use the 30/360 formula (i.e., every month earns 30 days' interest on a 360-day year).

30 year amortization schedule in excel