Amortization schedule
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An amortization schedule is a table detailing each periodic payment on a loan (typically a mortgage), as generated by an amortization calculator.
While a portion of every payment is applied towards both the interest and the Principal balance of the loan, the exact amount applied to principal each time varies (with the remainder going to interest). An amortization schedule reveals the specific dollar amount put towards interest, as well as the specific 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.
Many kinds of amortization exist, including:
- Straight line (linear)
- Declining balance
- Annuity
- Bullet (all at once)
- Increasing balance (negative amortisation)
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 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 reveals interest-paid-to-date, principal-paid-to-date, and the remaining principal balance on each payment date.
Example amortization schedule
(To run your own numbers, try an amortization calculator.)
This amortization schedule is based on the following assumptions:
- Principal = $100,000
- Annual Interest rate = 8%
- Number of payments = 360 (30 years x 12 months x 1 payment per month)
- Amortized Payment = $733.76
| # of payments | Principal | Interest | Principal to-date | Interest to-date | Principal balance |
|---|---|---|---|---|---|
| 1 | 67.09 | 666.67 | 67.09 | 666.67 | 99932.91 |
| 2 | 67.54 | 666.22 | 134.63 | 1332.89 | 99865.37 |
| 3 | 67.99 | 665.77 | 202.62 | 1998.66 | 99797.38 |
| 4 | 68.44 | 665.32 | 271.06 | 2663.98 | 99728.94 |
| 5... | 68.90 | 664.86 | 339.96 | 3328.84 | 99660.04 |
| ...359 | 724.03 | 9.73 | 99264.28 | 164155.56 | 735.72 |
| 360 | 735.72 | 4.90 | 100000.00 | 164160.46 | 0.00 |
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 the mortgage. Payment 1 allocates 90% of the total payment towards interest and only $67.09 (or 10%) toward the Principal balance. Not until payment 257 or 21 years into the loan does the payment allocation towards principal and interest even out and subsequently tip the majority of the monthly payment toward Principal balance pay down.
Second, understanding the above statement, the repetitive refinancing of an amortized mortgage loan, even with decreasing interest rates and decreasing Principal balance, can cause the borrower to pay over 500% of the value of the original loan amount. 'Re-amortization' or restarting the amortization schedule via a refinance causes the 90/10 rule of payment allocation to interest and Principal balance accordingly, thus causing substantial monies to be reallocated toward interest again. This economically unfavorable situation is often mitigated by the apparent decrease in monthly payment and interest rate of a refinance, when in fact the borrower is increasing the total cost of the property. This fact is often (understandably) overlooked by borrowers and never addressed by the mortgage professional.
Third, the payment on an amortized mortgage loan remains the same for the entire loan term, regardless of Principal balance owed. For example, the payment on the above scenario will remain $733.76 regardless if the Principal balance is $100,000 or $50,000. Paying down large chunks of the Principal balance in no way affects the monthly payment, it simply reduces the term of the loan, resulting in a quicker payoff. To avoid these caveats of an amortizing mortgage loan many borrowers are choosing an Interest-only loan to satisfy their mortgage financing needs. Interest-only loans have their caveats as well which must be understood before choosing the mortgage payment term that is right for the individual borrower.
External links
- Amortization schedule
Categories: Generally Accepted Accounting Principles | Basic financial concepts | Real estate
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