Last updated: • Not financial advice
Term, Frequency, and Compounding
Amortization schedules show how each payment splits between interest and principal. Longer terms reduce the periodic payment but raise total interest. Frequency (monthly vs quarterly vs annual) changes the number of periods per year and, with compounding, the effective rate per period used for amortization.
- Term: Legal maturity (e.g., 5, 7, 10, 15 years).
- Amortization: Schedule over which the payment is calculated; may match term or be longer/shorter.
- Frequency: Monthly (12), quarterly (4), semi‑annual (2), annual (1).
- Compounding: Converts nominal APR to per‑period rate for your frequency.
Payment Math
For principal P, nominal APR r, payments per year m, and total periods n = years × m, the per‑period rate is i = r/m. The fully amortizing payment is:
A = P · i / (1 − (1 + i)−n)
Each period’s interest equals current balance × i; principal reduction is A − interest. Early payments are interest‑heavy; later payments are principal‑heavy. That’s why small changes in i (rate) meaningfully change total interest.
Balloons & Reamortization
A balloon leaves a lump sum due at maturity, lowering periodic payments. It’s common to pair a 10–30% balloon with a 7–15 year amortization. Some lenders allow reamortization after prepayments or at reset points—confirm policies and any fees. See Balloon Payments for pros/cons and modeling tips.
Worked Examples
Example 1: Term Impact
Finance $1,000,000 at 8.0% APR, monthly payments. Over 7 years, payment is higher but saves six‑figure total interest vs 10 or 15 years. Use the calculator to compare total interest across terms; export CSV to confirm.
Example 2: Quarterly vs Monthly
At the same APR and term, quarterly payments are larger and accrue more interest between payments; total interest is usually slightly higher than monthly. See Payment Frequency for details.
Example 3: Adding a Balloon
With a 20% balloon, periodic payments drop, but you must plan for a refinance or sale at maturity. Ensure projected resale covers the balloon under conservative assumptions; otherwise, build a reserve plan.
Tradeoffs & Pitfalls
- Longer amortization: Eases payment but increases total interest.
- Quarterly cadence: Aligns with business cycles but needs cash reserves.
- Balloons: Improve cash flow now but add term‑end risk; pair with exit strategy.
- Prepayment: Reduces interest; check for penalties or make‑whole.
Modeling Workflow
- Choose a base case (balance, APR, term) in the calculator.
- Toggle frequency and compounding to match your offer; export CSV.
- Add a 10–30% balloon and re‑compare; note payment change and balloon feasibility.
- Stress APR ±100–200 bps. Consider fixed vs variable.
FAQs
Does compounding always match payment frequency?
Not always; some lenders quote nominal APR with monthly compounding even if you pay quarterly. Our calculator lets you set both explicitly.
Is a longer term always worse?
No—if it improves liquidity and reduces risk of distress, the trade can be wise. Consider prepayment to trim total interest when cash permits.
Can I change amortization mid‑loan?
Sometimes via modification or refinance. Ask about reamortization policies before you sign.
Related Articles
External: CFPB: APR · FRED interest rates