Amortization Schedule

What is an Amortization Schedule?

Definition: The amortization schedule refers to the allocation of loan payments over interest and principal for a determined period of time until a loan is paid off.

An amortization schedule is a complete table of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term. While each periodic payment is the same amount early in the schedule, the majority of each payment is interest; later in the schedule, the majority of each payment covers the loan’s principal. The last line of the schedule shows the borrower’s total interest and principal payments for the entire loan term.

What Does Amortization Schedule Mean?

This schedule is a very common way to break down the loan amount in the interest and the principal. Most people think that by making a minimum payment for their loan, they lower the principal amount. This depends on the duration of the loan.

For example, in the beginning of the term for a long-term loan, most of the payment goes towards lowering the interest. As the term progresses, a greater percentage of the payment goes to the principal and a lower percentage goes to the interest. So, people who want to pay off their loan fast, make extra payments in the beginning of the term.

What Is in an Amortization Table?

Every amortization table contains the same kind of information:

  • Scheduled payments: Your required monthly payments are listed individually by month for the length of the loan.
  • Interest expenses: Out of each scheduled payment, a portion goes toward interest, which is typically charged each month. It’s calculated by multiplying your remaining loan balance by your monthly interest rate. Especially with long-term loans, you’ll find that the interest eats up most of the payment in the early years.
  • Principal repayment: After you apply the interest charges, the remainder of your payment goes toward paying off your debt.

You can see how amortization works by viewing how your balance decreases over time.

Sample Amortization Schedule

Assume you borrow $100,000 at 6 percent for 30 years, to be repaid monthly. What would your amortization schedule look like? The first 12 lines in the table below detail your first year of payments, including monthly beginning and ending balances, and then the table skips to the end of the loan.

MonthBeginning BalanceScheduled PaymentPrincipalInterestEnding BalanceTotal Interest
1100,000.00599.5599.55500.0099,900.45500.00
299,900.45599.55100.05499.5099,800.40999.50
399,800.40599.55100.55499.0099,699.851,498.50
499,699.85599.55101.05498.5099,598.801,997.00
599,598.80599.55101.56497.9999,497.242,495.00
699,497.24599.55102.06497.4999,395.182,992.48
799,395.18599.55102.57496.9899,292.613,489.46
899,292.61599.55103.09496.4699,189.523,985.92
999,189.52599.55103.60495.9599,085.924,481.87
1099,085.92599.55104.12495.4398,981.794,977.30
1198,981.79599.55104.64494.9198,877.155,472.21
1298,877.15599.55105.16494.3998,771.995,966.59
3544,114.16599.55578.9820.573,535.18115,776.07
3553,535.18599.55581.8717.682,953.31115,793.74
3562,953.31599.55584.7814.772,368.52115,808.51
3572,368.52599.55587.7111.841,780.81115,820.35
3581,780.81599.55590.658.901,190.17115,829.26
3591,190.17599.55593.605.95596.57115,835.21
360596.57599.55593.582.98115,838.19

Additional Amortization Information

Some amortization tables show additional details about a loan.

  • Cumulative (or total) interest: If your table includes this column, you’ll be able to see a running total showing the total interest paid after a certain amount of time.
  • Extra payments: Basic amortization tables do not account for additional payments. But that doesn’t mean you can’t pay extra—and you can even calculate the benefit of those payments when you build your own amortization table.
  • Fees: Amortization schedules typically do not show additional charges that you might pay on your loan. For example, if you pay origination fees or other closing costs to get a mortgage, you need to evaluate those fees separately.

Methods of Amortization

There are different methods used to develop an amortization schedule. These include:

  • Straight line (linear)
  • Declining balance
  • Annuity
  • Bullet (all at once)
  • Balloon (amortization payments and large end payment)
  • Increasing balance (negative amortization)

Amortization schedules run in chronological order. The first payment is assumed to take place one full payment period after the loan was taken out, not on the first day (the origination date) of the loan. The last payment completely pays off the remainder of the loan. Often, the last payment will be a slightly different amount than all earlier payments.

In addition to breaking down each payment into interest and principal portions, an amortization schedule also indicates interest paid to date, principal paid to date, and the remaining principal balance on each payment date.

Amortization Schedule Assumptions

This amortization schedule is based on the following assumptions:

First, it should be known that rounding errors occur and, depending on how the lender accumulates these errors, the blended payment (principal plus interest) may vary slightly some months to keep these errors from accumulating; or, the accumulated errors are adjusted for at the end of each year or at the final loan payment.

There are a few crucial points worth noting when mortgaging a home with an amortized loan. First, there is substantial disparate allocation of the monthly payments toward the interest, especially during the first 18 years of a 30-year mortgage. In the example below, payment 1 allocates about 80-90% of the total payment towards interest and only $67.09 (or 10-20%) toward the principal balance. The exact percentage allocated towards payment of the principal depends on the interest rate. Not until payment 257 or over two thirds through the term does the payment allocation towards principal and interest even out and subsequently tip the majority toward the former.

For a fully amortizing loan, with a fixed (i.e., non-variable) interest rate, the payment remains the same throughout the term, regardless of principal balance owed. For example, the payment on the above scenario will remain $733.76 regardless of whether the outstanding (unpaid) principal balance is $100,000 or $50,000. Paying down more than the monthly contractual amount reduces the amount outstanding and thus the interest that is payable to the lender; if the contractual monthly payment stays the same, the number of payments and the term of the loan must decrease. Conversely, paying down less than the monthly contractual amount increases the amount outstanding and thus the interest payable (negative amortization); if the contractual monthly payment stays the same, the number of payments and the term of the loan must increase.

Summary

Define Amortization Schedules: Amortization schedule means a table showing a detailed listing of a loan’s balance as interest and principal payments are made.

  • An amortization schedule is a complete table of periodic loan payments that shows the amounts of principal and interest that comprise each payment, until the loan is paid off at the end of its term.
  • Amortization schedules are common for installment loans that have known payoff dates at the time the loan is taken out, such as a mortgage or a car loan.

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