Calculating amortization schedule details can be a very difficult task. An amortization schedule is a detailed listing on how a loan, such as a mortgage loan, will be paid over time. It lists details including how much of the principal and interest will be paid with each payment.
How An Amortization Schedule Works
Amortization is the process of eliminating debt over a period of time through the use of periodic payments. For example, with a mortgage loan, each month a payment is made to the mortgage lender. Part of each payment is used to cover the interest owed while the other portion is used to pay down the principal on the account.
When you use an amortization calculator, the complex calculations are done for you. What is produced is the amortization schedule, a document outlining each of the payments towards the account. Each payment on the schedule is shown on one line. This schedule will include information such as:
- The amount of each payment required to be made.
- The amount of each payment that will be paid towards interest alone.
- The amount of each payment that will be paid towards the principal alone.
- The amount of interest paid to date of each payment.
- The amount of principal left to be paid.
At the end of the schedule, it also details the total or principal and interest paid over the course of the loan.
Calculating Amortization Schedules
There are several basic aspects to understand when considering amortization. First, the principal is the amount of the initial debt. This is the amount of the purchase price of a home, for example, that is financed. The second important term to understand is the interest rate; this is the amount an individual must pay to borrow the money. The final aspect of the equation is time. Time is the period of time that it will take to pay down the loan. This is usually calculated using the number of months rather than years.
Calculating amortization schedules requires understanding the mathematical relationship between these terms.
The equation used is: I=PRT.
I is the Interest, P is the Principal, R is the Interest Rate and T is Time.
Here is an example of how this works: If you purchase a home for $20,000 with a loan for five years, or 60 months, at 6 percent interest, this is how the equation would work.
The initial payment after receiving the loan would occur 30 days after the funds were received. In this equation, the first thing to determine is the monthly payment, which should be 1/60th of the total principal. This will be geared towards paying down the loan. The monthly payment also needs to take into account interest that is at least 1/60th of the total interest charged on the loan.
It may seem that this process is simple to calculate, but what needs to be factored into the situation is time. Each month there are complex calculations that need to be made, including interest. Plus, if you add in variable interest rates, this complicates the process even more so. It is because of these varying details that it is often best to use amortization calculators to help you to do the calculating.
To demonstrate how this example is factored out, consider the following chart.
| Month | Payment | Principal Paid | Interest Paid | Total Interest | Balance |
| 2 | 386.66 | 286.66 | 100.00 | 100.00 | 19713.34 |
| 3 | 386.66 | 288.09 | 98.57 | 198.57 | 19425.25 |
| 4 | 386.66 | 289.53 | 97.13 | 295.69 | 19135.72 |
| 5 | 386.66 | 290.98 | 95.68 | 391.37 | 18844.75 |
Over time, the amount of principle paid will rise per payment while the amount of interest paid per month will fall. This is because as more principal is paid off, there is less principal left on the loan for the interest to be applied to.
Use the amortization calculator above to help you get a look at the bigger picture of what a mortgage loan will cost you.
