Understanding Amortization Schedule
The amortization schedule is about your loan payments. When you make changes to how much you owe on your mortgage loan it’s called amortization.
You need to make sure you understand the difference between depreciation, which means that your product has lost value over time, and amortization, which means that you’ve paid off the principal over time.
When you make payments on your mortgage part of that goes to the principal and part of it goes to the interest.
What is Mortgage Loan Amortization?
For the most part, your home is going to be the biggest investment that you ever make. As a result, you have to get a mortgage in order to pay for it.
And that mortgage is an amortized loan where you may payments regularly over time. Your amortization period is the amount of time that you take out the loan for (20 years, 30 years, etc.).
Most people prefer to go with a 30 year fixed rate mortgage, but you can choose shorter or even longer ones in some instances.
You want to make sure you understand the amortization of your mortgage and how much you’re going to pay over the life of the mortgage itself.
If you take a longer time for your amortization you’ll pay less monthly but in the end you’re going to pay a whole lot more for the interest.
If you have a shorter period you’re going to pay more each month but you’ll ultimately pay less overall. It’s up to you to decide which of these options is going to be the best way to go and the best fit for your budget.
Amortization Schedule – Example
We’re going to take a look at a table of loan payments and how they work as an amortization schedule.
Keep in mind that this consists of both a principal and an interest payment and that as you continue to pay the interest is going to slowly start to go down.
You’ll pay more in interest at the beginning and then you’ll gradually start paying off the principal. You’ll see how much you’ll pay in interest and principal payment by the end of the mortgage as well.
Now, amortized home loans look on the first day of each month as the only day of the year, so they consider only a single amortization day each month.
You’re going to pay interest from the day you close on the mortgage to the day you start recording, which is the first day of the month following the closing.
With this type of schedule, you’re going to make payments each month and a small portion of them will go toward the principal and a portion toward the interest.
So, we’re going to take a look at a chart of what this looks like below.
|Date||Interest||Total Interest||Principal||Total Payment||Balance|
This type of schedule can help you estimate just how much you’re going to pay overall and when combined with a mortgage calculator it can be even more beneficial.
Creating Your Own Amortization Schedule
If a loan is taken out with a definite end date then the lender or you as the borrower can create an amortization schedule.
These give you the ability to know how much you’re going to pay because all you need to know is the term and the payment and the interest that you’re paying. You don’t even need to use a calculator in order to get it.
Let’s say you have a 30-year mortgage and a 5% interest rate. Your loan balance is $400,000 and your monthly payment is then $2,148.
For the first month you just take that full $400,000 and multiply it by the periodic interest rate, which is 1/12 of the total interest rate.
You’ll end up with $400,000 x 0.00416=$1,667. That means you take the monthly payment amount ($2,148) and you subtract the number you just ended up with ($1,667) and you can then figure out how much you’re paying toward the principal.
Your next month is going to look a little different. You want to look at the principal amount and subtract that from the total balance of the loan.
Your new loan balance is actually $399,519 because you can only subtract the amount you paid to the principal. Then you go through the same process to get an idea of how much you’re paying toward the principal again for the second month (and so on).