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Amortization Schedule Breakdown and Understanding Principal Vs Interest

Amortization Schedule Calculator

Understanding an amortization schedule can be very useful. A mortgage amortization schedule is broken down on a monthly basis to show you exactly what you’re paying the bank each month and how much you still owe. I could probably survey 100 people and 50 of them wouldn’t even know how much they owe on their mortgage. These people are going to be taken advantage of at some point in the mortgage process. With some basic knowledge on mortgage calculators and interest rates you can understand when someone might be trying to trick you.

Your mortgage is recalculated each month based on how much principal is paid down. Your mortgage payment will always stay the same, but the principal goes up and the interest will come down as time goes on. Example below:

Enter this information into a mortgage calculator;

Mortgage amount – $100,000.00

Fixed Interest Rate – 6.0%

Years – 30

Based on that information you will see that the monthly mortgage payment is $599.55 and over the course of 30 years you will have paid $115,838.19 JUST in interest! That’s more than the cost of the home itself! It’s only natural to try and reduce that number. First, we need to understand it by looking at the information from the mortgage calculator.

The graph below shows you the breakdown of each payment you make over the first year.

Monthly Payment – $599.55

Month Interest Payment Principal Payment Remaining Balance

$100,000.00
1 $500.00 $99.55 $99,900.45
2 $499.50 $100.05 $99,800.40
3 $499.00 $100.55 $99,699.85
4 $498.50 $101.05 $99,598.80
5 $497.99 $101.56 $99,497.24
6 $497.49 $102.06 $99,395.18
7 $496.98 $102.57 $99,292.61
8 $496.46 $103.09 $99,189.52
9 $495.95 $103.60 $99,085.92
10 $495.43 $104.12 $98,981.79
11 $494.91 $104.64 $98,877.15
12 $494.39 $105.16 $98,771.99

First of all, in the amortization schedule the “Interest payment” and “principal payment” columns will always equal your monthly payment amount of $599.55. Some of it will go toward the $100,000 that you owe, and the rest of it goes toward interest.

Notice that the amount you owe is lowered by the amount of principal you pay each month (100,000 – 99.55 = 99,900.45) If you pay an extra $200.00 toward principal then it would be 100,000 – 99.55 – 200.00 = 99,700.45.

The interest payment goes to the bank for loaning you that specific amount of money. The bank tells you the yearly interest rate (6%) for added confusion because it’s actually calculated monthly. Take your yearly interest rate and divide it by 12 (12 months). You can plug those numbers into a mortgage calculator or see the graph above. 6% / 12 months = 0.50% per month. So you owe 100,000 x .005 (.50%) = $500.00 in interest for the first month (See above graph). So the less money you owe the bank, the less interest you pay each month. That’s why paying principal down faster is better.

Like I said before, each month the mortgage payment is recalculated so the amount of principal you pay each month is up to you! No matter how you look at it, you owe the bank $100,000.00 and while you owe that money they want something in return (Interest). I believe banks are very fair with the interest rates they offer, whatever they might be. Otherwise you would have to save $100,000.00 to buy a home, rather than just the down payment, which means most people wouldn’t ever buy a home at all.

By: Chris G Bell

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Posted in Real Estate · August 21st, 2010 · Comments (0)

Loan Amortization – Determining Your Monthly Payment

Loans are very much available everywhere. There are lots of financial institutions offering different kinds of services like car loans, home, loans, and medical loans and so on. If in case you’ll have cash shortages, you can always go to a nearest lender and apply. The application process is getting easier and faster.

Thanks to modern technology, you can even apply online. With just a few clicks, you will immediately know whether your application has been approved or not. But before you go running to a lender, you must be aware about loan amortization. Remember, you are borrowing money in here.

Therefore, you have the responsibility to pay your lender every month until you pay the full amount. It’s advisable to assess first whether you can afford to avail or not. To avoid some debt problems in the future, you must determine the total cost of the loan. For example, you want to obtain $5000 of personal loan. However, you will not only pay the whole $5000 but interest as well. The hard part actually in obtaining loans is in terms of the monthly installment. You must first ask yourself if you will be able to raise the money for the payment.

The loan amortization is actually in the form of a schedule. The loan amortization schedule will exactly give you the necessary information you want like the amount you need every month. The monthly payment basically comprises the reduction in the principal plus the interest payment. The three factors that are very important in the computation of the loan amortization are interest rate, loan amount and the agreed period. It is essential to look for a loan with the lowest interest rate. Actually, the rate will depend on a lot of things like your credit history, down payment, your income and others.

You can negotiate for a lower interest if you have a good credit score or you can provide a down payment. The interest plays a vital role in procuring loans. It can either do well to your finances or it can give you troubles in the end. There are some cases where borrowers can’t pay their loans anymore because the interest rates are too high. It’s important to look for loans with an interest rate you can afford. Another thing to consider is the loan amount. The higher the amount you want to avail, the higher the amount you will be paying every month.

To make paying not burdensome, try borrowing an amount which is within your budget. The loan period is also as important of the two. If you will opt for a longer period of time, you will be paying much interests but the monthly installment is quite affordable. On the other hand, a shorter period entails higher monthly payments but you can save a lot for interests. Basically, it’s your decision. That’s why it is an essential thing to understand loan amortization in order to make loans advantageous on your part and not a trouble on your finances. The monthly payment should not pose a burden but just part of your monthly expenses.

By: Rick Goldfeller

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Posted in Finance · September 30th, 2008 · Comments (0)

How Amortization Works

An amortized loan can be a car loan or a home loan, as long as it is for one specific amount that is to be paid off by a certain date in equal installments. Parts of the payment go toward the interest cost and the remainder goes toward the principal amount. Interest calculated is based on the current amount owed. As the ending balance of the loan reduces, the interest also decreases progressively, termed as “amortization.”

Like mortgages, with an amortized loan during the first few months/years of the loan term, a greater percentage of the payment goes toward interest in comparison to principal balance or the amount borrowed. This can be explained with a mortgage loan for $100,000 at 6.5 percent for 30 years as an example:

The monthly principal and interest payment is $632.07. For the first month, the interest owed for $100,000 is equal to $541.67. The remainder of the payment, $90.40, goes toward principal, thereby reducing the debt by that amount.

The interest owed drops down to $99,909.60 in the second month, so $541.18 goes to interest and $90.89 goes to principal. The interest goes on decreasing with each passing month while the principal reduction increases, and continues until $3.41 goes to interest and $628.66 to principal on the 360th payment.

Basically, half the loan has been paid off after 256 payments (21 years and 4 months). The other half can be paid off in 8 years and 8 months. A typical amortization schedule calculator would produce an amortization table displaying how much interest and how much principal, from the first to the last, is included in each monthly payment.

By: Richard Romando

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Posted in Real Estate · July 26th, 2008 · Comments (0)

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