Definition§
An amortization schedule is a comprehensive table that lists each periodic payment on a loan over time. It breaks down how much of each payment goes toward interest and how much toward the principal balance. The schedule also includes the remaining unpaid balance after each payment is made.
Examples§
Example: An amortization schedule for a $1,000 principal, 5-year self-amortizing loan at 10% interest with annual payments is shown in Table 2.
Table 2: Amortization Schedule
| Year | Beginning Balance | Annual Payment | Interest | Principal | Ending Balance |
|---|---|---|---|---|---|
| 1 | $1,000.00 | $263.80 | $100.00 | $163.80 | $836.20 |
| 2 | $836.20 | $263.80 | $83.62 | $180.18 | $656.02 |
| 3 | $656.02 | $263.80 | $65.60 | $198.20 | $457.82 |
| 4 | $457.82 | $263.80 | $45.78 | $218.02 | $239.80 |
| 5 | $239.80 | $263.80 | $23.98 | $239.82 | $0.00 |
Frequently Asked Questions§
What is the purpose of an amortization schedule?§
An amortization schedule helps borrowers understand how each payment is allocated between interest and principal, providing insight into how the debt decreases over time.
How can an amortization schedule help in financial planning?§
By showing the exact amounts going towards interest and principal, an amortization schedule allows borrowers to anticipate their debt repayment timeline and plan their finances accordingly.
Does an amortization schedule change if extra payments are made?§
Yes, making extra payments towards the principal will alter the schedule, often reducing the total interest paid and shortening the loan term.
Can an amortization schedule be used for types of loans other than mortgages?§
Absolutely. Amortization schedules can be created for any type of amortizing loan, including car loans, personal loans, and student loans.
How do interest rates affect the amortization schedule?§
Higher interest rates will result in higher interest payments, especially in the earlier stages of the loan, thus altering the distribution between interest and principal reported in the schedule.
Related Terms§
Principal§
The amount borrowed or the outstanding balance of a loan, excluding interest.
Interest§
The cost of borrowing money, typically expressed as an annual percentage of the principal.
Loan Term§
The period over which the loan is to be repaid.
Fixed-Rate Mortgage§
A type of mortgage where the interest rate remains constant throughout the term of the loan.
Adjustable-Rate Mortgage (ARM)§
A mortgage with an interest rate that can change periodically based on the performance of a specific benchmark.
Online Resources§
- Investopedia: Amortization Schedule
- Bankrate: Amortization Calculator
- The Mortgage Reports: Amortization Calculator
References§
- “The Truth About Amortization,” Investopedia.
- “Loan Amortization,” Bankrate.
- “Understanding Amortization Schedules,” The Balance.
Suggested Books for Further Studies§
- “Mortgage Management for Dummies” by Eric Tyson
- “Amortization Essentials for CFOs” by Steven M. Bragg
- “The Loan Payment Calculation Handbook” by Thomas Crosby
