An amortization schedule is a table detailing each periodic payment on an

amortizing loan In banking and finance, an amortizing loan is a loan where the principal of the loan is paid down over the life of the loan (that is, amortized) according to an amortization schedule, typically through equal payments. Similarly, an amortizing b ...

(typically a

mortgage A mortgage loan or simply mortgage (), in civil law jurisdicions known also as a hypothec loan, is a loan used either by purchasers of real property to raise funds to buy real estate, or by existing property owners to raise funds for any ...

), as generated by an

amortization calculator An amortization calculator is used to determine the periodic payment amount due on a loan (typically a mortgage), based on the amortization process. The amortization repayment model factors varying amounts of both interest and principal into eve ...

. Amortization refers to the process of paying off a debt (often from a loan or mortgage) over time through regular payments. A portion of each payment is for interest while the remaining amount is applied towards the principal balance. The percentage of interest versus principal in each payment is determined in an amortization schedule. The schedule differentiates the portion of payment that belongs to interest expense from the portion used to close the gap of a discount or premium from the principal after each payment. While a portion of every payment is applied towards both the

interest In finance and economics, interest is payment from a borrower or deposit-taking financial institution to a lender or depositor of an amount above repayment of the principal sum (that is, the amount borrowed), at a particular rate. It is distin ...

and the

principal balance The principal balance, in regard to a mortgage or other instrument of debt, is the amount due and owed to satisfy the payoff of an underlying obligation, sans interest or other charges. Amortized mortgage loans automatically pay a portion of eac ...

of the loan, the exact amount applied to principal each time varies (with the remainder going to interest). An amortization schedule indicates the specific monetary amount put towards interest, as well as the specific amount put towards the principal balance, with each payment. Initially, a large portion of each payment is devoted to interest. As the loan matures, larger portions go towards paying down the principal.

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 In finance, negative amortization (also known as NegAm, deferred interest or graduated payment mortgage) occurs whenever the loan payment for any period is less than the interest charged over that period so that the outstanding balance of the loa ...

) 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 In finance, a loan is the lending of money by one or more individuals, organizations, or other entities to other individuals, organizations, etc. The recipient (i.e., the borrower) incurs a debt and is usually liable to pay interest on that ...

. The last payment completely pays off the remainder of the

. 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

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

. 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 (

); if the contractual monthly payment stays the same, the number of payments and the term of the loan must increase.

References

External links

* {{curlie, Business/Financial_Services/Mortgages/Calculators, Amortization calculators

References

Loans