What is an amortization schedule?
A amortization table is a complete table of the periodic payments of the loan, showing the amount of the principal and the amount of interest that make up each payment until the loan is repaid at the end of its term. Although each periodic payment is the same amount at the start of the schedule, the majority of each payment is made up of interest; later in the schedule, the majority of each payment covers the principal of the loan. The last line of the table shows the total interest and principal repayments of the borrower for the duration of the loan.
In an amortization schedule, the percentage of each payment that goes to interest decreases a little with each payment and the percentage that goes to the principal increases. For example, the first lines of an amortization schedule for a fixed rate mortgage of $ 250,000 over 30 years with an interest rate of 4.5% looks like this:
|Month||Month 1||Month 2||Month 3|
|Full payment||$ 1,266.71||$ 1,266.71||$ 1,266.71|
|Main||$ 329.21||$ 330.45||$ 331.69|
|interest||$ 937.50||$ 936.27||$ 935.03|
|Total interest||$ 937.50||$ 1,873.77||$ 2,808.79|
|Loan balance||$ 249,670.79||$ 249,340.34||$ 249,008.65|
In addition to using an amortization schedule, if you are looking to take out a loan, you can estimate the total cost of your mortgage based on your specific mortgage using a tool like a mortgage calculator.
Key points to remember
- An amortization table is a complete table of periodic loan payments that shows the principal and interest amounts that make up each payment, until the loan is repaid at the end of its term.
- Amortization schedules are common for installment loans whose repayment dates are known at the time of purchase, such as a mortgage or car loan.
Understanding the amortization schedule
Borrowers and lenders use amortization schedules for installment loans whose repayment dates are known when the loan is taken out, such as a mortgage or car loan. If you know the term of the loan and the total periodic payment, there is a simple way to calculate an amortization schedule without using an amortization schedule or an online calculator.
To illustrate this, imagine that a loan has a term of 30 years, an interest rate of 4.5% and a monthly payment of $ 1,266.71. From the first month, multiply the loan balance ($ 250,000) by the periodic interest rate. The periodic interest rate is one twelfth of 4.5%, so the resulting equation is $ 250,000 x 0.00375 = $ 937.50. The result is the amount of interest from the first month of payment. Subtract this amount from the periodic payment ($ 1,266.71 – $ 937.50) to calculate the portion of the loan payment allocated to the principal of the loan balance ($ 329.21).
To calculate the interest and principal for the following month, subtract the principal payment made in the first month ($ 329.21) from the loan balance ($ 250,000) to obtain the new loan balance ($ 249,670.79), then repeat the above steps to calculate how much of the second installment is allocated to interest and principal. Repeat these steps until you have created a amortization schedule for the duration of the loan.
If a borrower chooses a shorter amortization period for their mortgage, such as 15 years, they will save considerably on interest over the life of the loan … and will own the home sooner. In addition, the interest rates on short term loans are often at a discount compared to longer term loans. Short amortization mortgages are good options for borrowers who can handle higher monthly payments without difficulty; they always involve making 180 sequential payments. It is important to determine whether or not you can maintain this level of payment.