What is an 'Amortization Schedule'

An amortization schedule is a complete table of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term. While each periodic payment is the same amount early in the schedule, the majority of each payment is interest; later in the schedule, the majority of each payment covers the loan's principal. The last line of the schedule shows the borrower’s total interest and principal payments for the entire loan term.

In an amortization schedule, the percentage of each payment that goes toward interest diminishes a bit with each payment and the percentage that goes toward principal increases. For example, the first few lines of an amortization schedule for a $250,000, 30-year fixed-rate mortgage with a 4.5% interest rate looks like this:

Month Month 1 Month 2 Month 3
Total Payment $1,266.71 $1,266.71 $1,266.71
Principal $329.21 $330.45 $331.69
Interest $937.50 $936.27 $935.03
Total Interest $937.50 $1,873.77 $2,808.79
Loan Balance $249,670.79 $249,340.34 $249,008.65

 

In addition to using an amortization schedule, if you are looking to take out a loan you can estimate your total mortgage costs based on your specific mortgage using a tool like a mortgage calculator. 

 

How to Make an Amortization Schedule

Borrowers and lenders use amortization schedules for installment loans that have payoff dates that are known at the time the loan is taken out, such as a mortgage or a car loan. If you know the term of a loan and the total periodic payment, there is an easy way to calculate an amortization schedule without resorting to the use of an online amortization schedule or calculator.

To illustrate, imagine a loan has a 30-year term, a 4.5% interest rate and a monthly payment of $1,266.71. Starting in month one, multiply the loan balance ($250,000) by the periodic interest rate. The periodic interest rate is one-twelfth of 4.5%, so the resulting equation is $250,000 x 0.00375 = $937.50. The result is the interest amount of the first month's payment. Subtract that amount from the periodic payment ($1,266.71 - $937.50) to calculate the portion of the loan payment allocated to the principal of the loan's balance ($329.21).

To calculate the next month’s interest and principal payments, subtract the principal payment made in month one ($329.21) from the loan balance ($250,000) to get the new loan balance ($249,670.79), and then repeat the steps above to calculate which portion of the second payment is allocated to interest and principal. Repeat these steps until you have created an amortization schedule for the life of the loan.

BREAKING DOWN 'Amortization Schedule'

RELATED TERMS
  1. Amortized Loan

    A loan with scheduled periodic payments of both principal and ...
  2. Negatively Amortizing Loan

    A loan with a payment structure that allows for a scheduled payment ...
  3. Negative Amortization Limit

    A provision in certain loan contracts that limits the amount ...
  4. Negative Amortization

    An increase in the principal balance of a loan caused by making ...
  5. Standing Loan

    A type of loan where payments are made of interest only. Repayment ...
  6. Accelerated Payments

    A term associated with making additional unscheduled payments ...
Related Articles
  1. Personal Finance

    What is an Amortization Schedule?

    An amortization schedule is a table that shows the amounts of principal and interest that comprise each loan payment.
  2. Personal Finance

    Mortgage Amortization Strategies

    Should you get a 30-year mortgage? A 15-year one? Ways to decide which mortgage is the best fit.
  3. Personal Finance

    Understanding the Mortgage Payment Structure

    We explain the calculation and payment process as well as the amortization schedule of home loans.
  4. Personal Finance

    Simple Interest Loans: Do They Exist?

    Yes, they do. Here is what they are – and how to use them to your advantage.
  5. Personal Finance

    How Interest Rates Work On A Mortgage

    A step-by-step explanation of the interest calculations, mortgage types, and how the loan is eventually "retired" – which means paid off.
  6. Personal Finance

    Understanding Term Loans

    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate.
  7. Personal Finance

    Interest-Only Mortgages: Home Free or Homeless?

    These loans can be beneficial, but for many borrowers, they present a financial trap.
  8. Personal Finance

    Best 3 Mortgage Calculator Websites with PMI

    Learn more about all of the factors behind PMI, and discover the three best websites that provide a mortgage calculator that includes PMI.
RELATED FAQS
  1. Are Student Loans Amortized?

    Student loans typically get paid back over time on a fixed payment, or amortized, schedule. Read Answer >>
  2. Which is better, a fixed or variable rate loan?

    Interest on variable interest rate loans vary as market interest rates change. Interest on fixed interest rate loans will ... Read Answer >>
  3. Why is more interest paid over the life of a loan when it is capitalized?

    Learn what it means to capitalize interest on a loan. Understand why more interest is paid over the life of a loan when it ... Read Answer >>
  4. How should you choose the amortization period for your mortgage?

    Read about key considerations that homeowners should take into account before choosing the amortization period for their ... Read Answer >>
Trading Center