Calculation methodology

How the loan projection models work.

Loan Projection Tool uses monthly amortization logic to estimate balances, scheduled principal and interest, cash-flow spikes, additional principal effects, and ARM reset scenarios from user-entered assumptions.

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Budgeting estimate only. This tool is not legal, tax, or financial advice. Outputs are rough projections based on user-entered assumptions and should not be treated as a lender payoff quote or guaranteed result.

User assumptions first

The calculators use the values entered on the page. Current principal balance is treated as the balance at the projection start date.

Monthly periods

Each row represents one scheduled monthly payment period. Interest is estimated once per period using the beginning balance and annual rate divided by 12.

Principal after interest

Scheduled P&I is split between interest and scheduled principal. Extra principal is then applied after scheduled principal.

Cash flow is separate

Property tax is included in cash-flow views, but it does not reduce loan balance or change amortization.

Monthly calculation flow

For each projected payment date, the model runs a consistent sequence. The ARM calculator adds rate-reset checks before calculating that month’s scheduled P&I.

Start with beginning principal balance

The opening balance for the month is the prior month’s ending balance, or the entered current principal balance for the first modeled month.

Determine the active rate

Fixed-rate projections keep the same rate. ARM projections select the scenario rate based on reset dates, caps, floor, ceiling, and increment assumptions.

Calculate interest

Monthly interest equals beginning balance multiplied by the annual rate divided by 12, rounded to cents.

Apply scheduled principal

Scheduled principal equals scheduled P&I minus interest. If the scheduled payment exceeds the remaining balance plus interest, the final payment is capped.

Apply extra principal

Monthly additional principal and one-time lump-sum principal are applied after scheduled principal, limited so the balance does not go below zero.

Record outputs

The row stores ending balance, scheduled P&I, interest, principal, extra principal, property tax cash flow, and cumulative totals.

Monthly interest

Interest is calculated from the balance at the start of each monthly period.

monthly interest = beginning balance × annual rate ÷ 12

Example: a 5.25% annual rate is treated as 0.0525 ÷ 12 for monthly interest.

Scheduled principal

Scheduled principal is whatever remains from the scheduled P&I payment after monthly interest is covered.

scheduled principal = scheduled P&I − monthly interest

If this value is negative, the model flags a negative amortization warning because scheduled P&I does not cover that month’s interest.

Payment formula

When base P&I is auto-calculated or an ARM scenario recasts, the standard amortizing payment formula is used.

payment = balance × r ÷ (1 − (1 + r)⁻ⁿ)
r = annual rate ÷ 12
n = remaining months

If the monthly rate is zero, the payment is modeled as balance divided by remaining months.

Ending balance

Ending balance is reduced by scheduled principal and extra principal, but not by property tax or other cash-flow-only items.

ending balance = beginning balance − scheduled principal − extra principal

Extra principal is capped at the remaining unpaid balance after scheduled principal.

ARM reset schedule

The ARM Projection Tool supports preset and custom reset windows. Presets define the first fixed-rate window and the recurring adjustment interval.

Preset	First window	Later window	Typical use
3/3 ARM	3 years	Every 3 years	Shorter initial period with less frequent later resets.
5/1 ARM	5 years	Every 1 year	Common ARM structure with annual adjustments after year five.
7/1 ARM	7 years	Every 1 year	Longer initial fixed window before annual adjustments.
10/1 ARM	10 years	Every 1 year	Longest preset initial fixed window in the tool.
Custom	User-entered	User-entered	Manual modeling for nonstandard reset timing.

ARM scenario paths

Each ARM scenario uses the same payment dates and reset schedule, but applies a different rate path.

Worst case: rate increases by the entered increment at each scheduled adjustment, capped by the rate ceiling.
Neutral scenario: rate stays at the initial rate, while scheduled P&I can still recast at adjustment dates when recast modeling is enabled.
Best case: rate decreases by the entered increment at each scheduled adjustment, floored by the rate floor.

Important: These scenarios are mechanical stress tests. They are not rate forecasts.

ARM recast behavior

At a modeled adjustment date, scheduled P&I is recalculated using the then-current balance, the scenario rate, and the remaining scheduled months. This estimates payment shock from rate changes and recast timing.

Recast dates align to the first scheduled payment on or after each reset date.
Remaining term is based on the original first payment date and original term.
Extra principal paid before a recast can reduce the balance used for the recast calculation.

Scheduled-only ARM comparisons

Scheduled-only scenario lines use the same rate path and reset schedule as the corresponding visible scenario, but they ignore monthly extra principal and one-time lump-sum principal inputs.

This isolates how much of a projected improvement is caused by additional principal rather than by rate path or reset timing.

Fixed-rate projection logic

The Fixed Projection Tool keeps the annual interest rate constant for the projection. Scheduled P&I is constant unless the final payment is smaller because the remaining balance is almost paid off.

Auto-calculated base P&I uses original mortgage amount, fixed rate, and original term.
The entered current balance is used as the balance at projection start.
The model compares scheduled-only amortization against the “with additional principal” scenario.

Fixed-rate scenario comparison

The fixed calculator has two primary paths:

Scheduled-only projection: standard amortization using scheduled P&I only.
With additional principal: the same loan assumptions with monthly or one-time extra principal applied.

Interest saved is estimated by comparing cumulative interest between those paths.

Property tax cash-flow treatment

Property tax is modeled as a cash-flow item only. It appears in monthly cash outflow and cumulative cash-flow views, but it does not affect interest, principal, payoff date, or ending balance.

Monthly, quarterly, semiannual, and annual frequencies are supported.
Tax due dates are anchored to the first scheduled payment date.
Escrow smoothing is not modeled; taxes appear as periodic cash-flow spikes.

Additional principal treatment

Extra principal is applied after scheduled principal for the month. It directly reduces balance and can reduce future interest because future monthly interest is calculated from a lower balance.

Monthly extra principal applies only inside the selected start and end date window.
A lump-sum extra payment applies to the first scheduled payment on or after the selected date.
Extra principal is capped at the remaining balance after scheduled principal.

Reference schedule and calibration

The default assumptions are aligned to a reference amortization schedule and CSV dataset for a $235,000 mortgage, 30-year term, 5.25% initial rate, and first scheduled payment on July 1, 2024. The reference schedule is used as a behavioral baseline for monthly amortization, cent rounding, cumulative interest, and ending balance behavior.

Reference item	Default value	How the tool uses it
Original mortgage amount	$235,000	Used for auto-calculating base monthly P&I.
Initial / fixed rate	5.25%	Used for baseline interest and fixed-rate projection logic.
Original term	30 years	Defines the original 360-month amortization horizon.
First scheduled payment	July 1, 2024	Anchors monthly payment dates and tax-frequency timing.
Base monthly P&I	$1,297.68	Default scheduled P&I before ARM recast or manual override.

Actual lender servicing systems can differ because of daily interest conventions, payment posting dates, escrow handling, fees, servicer rounding, and loan-specific documents.

What the model does not do

It does not pull live market rates, index values, margins, lender data, or servicing records.
It does not model escrow analysis, insurance, PMI changes, late fees, curtailment rules, or taxes beyond simple periodic cash-flow entries.
It does not guarantee payoff dates, lender quotes, rate adjustments, tax bills, or payment amounts.
It does not replace loan documents, lender disclosures, tax records, or professional advice.

How to interpret results

Use the projections to compare scenarios, not to certify exact servicing outcomes.
Focus on directional differences: interest range, payment shock, payoff timing, and cash-flow exposure.
For binding payoff figures, rely on your lender or servicer.
For tax, legal, or financial decisions, use qualified professional guidance.

Related tool pages

Use the calculators after reviewing the methodology.

Related learning pages

These pages support ARM-specific interpretation.