Amortization is the practice of spreading regular payments over a designated number of years, which reduces your total debt. It’s especially useful when it comes to mortgages, car loans and other large-ticket items like furniture.
Amortization Schedule Explained
An amortization schedule outlines your loan in detail and divides it into principal and interest, which is the amount owed on a debt. It shows how much of each payment goes toward paying off principal, as well as listing monthly payments, their amounts owed each month, and when you’ll finish paying off the entire loan.
An amortization schedule is essential in understanding how much of your payment goes toward interest and principal. Initially, most of your payment goes toward interest; however, as more payments are made over time, the percentage going toward interest will decrease while that for principal will increase.
How to Calculate an Amortization Schedule
To create a mortgage amortization schedule, begin with your total loan amount and interest rate. Divide this figure by 12 to get your monthly interest payment amount. Use this figure when calculating each payment each month.
In the following column, total up all your monthly payment amounts so far. In the subsequent row, subtract the total interest paid thus far from that total.
Your initial payment should equal the original loan amount, with any remaining funds going toward interest and principal. By the end of your term, ensure that any remaining balance on your loan has been paid off completely.
When you close on a mortgage or other loan, the amortization schedule can be found. Some lenders provide samples of amortization schedules as part of the loan package, but you may also generate one yourself using Microsoft Excel or similar program.
An amortization schedule for a mortgage or other loan will include the total loan amount, interest rate and term. It also displays how many months remain until maturity and what the balance will be at those dates.
When looking to purchase a home, comparing the amortization schedules of various mortgages can help you decide which loan is most advantageous for you. It also helps determine if refinancing makes financial sense.
Understanding Your Amortization Schedule
An amortization schedule will show you how much of each payment goes to principal and interest, helping you budget more accurately. It also indicates if making extra payments to pay off the mortgage early makes financial sense.
