What Is an Amortization Schedule? How to Calculate With Formula

What Is Amortization Schedule?

Investopedia / Sydney Saporito

What Is an Amortization Schedule?

Amortizing loans feature level payment amounts over the life of the loan, but with varying proportions of interest and principal making up each payment. A traditional mortgage is a prime example of such a loan.

A loan amortization schedule represents the complete table of periodic loan payments, showing the amount of principal and interest that comprise each level payment until the loan is paid off at the end of its term. Early in the schedule, the majority of each payment goes toward interest; later in the schedule, the majority of each payment begins to cover the loan's remaining principal.

Key Takeaways

  • A loan amortization schedule is a table that shows each periodic loan payment that is owed, typically monthly, for level-payment loans.
  • The schedule breaks down how much of each payment is designated for the interest versus the principal.
  • Loan amortization tables can help a borrower keep track of what they owe and when payment is due, as well as forecast the outstanding balance or interest at any point in the cycle.
  • Loan amortization schedules are often seen when dealing with installment loans that have known payoff dates at the time the loan is taken out.
  • Examples of amortizing loans include mortgages and car loans.


Understanding an Amortization Schedule

If you are taking out a mortgage or auto loan, your lender should provide you with a copy of your loan amortization schedule so you can see at a glance what the loan will cost and how the principal and interest will be broken down over its life.

In a loan 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. Take, for example, a loan amortization schedule for a $165,000, 30-year fixed-rate mortgage with a 4.5% interest rate:

Example 30-year Amortization Schedule
Example 30-year Amortization Schedule.

Image by Sabrina Jiang © Investopedia 2020

Amortization schedules can be customized based on your loan and your personal circumstances. With more sophisticated amortization calculators, like the templates you can find in Excel you can compare how making accelerated payments can accelerate your amortization. If for example, you are expecting an inheritance, or you get a set yearly bonus, you can use these tools to compare how applying that windfall to your debt can affect your loan's maturity date and your interest cost over the life of the loan.

In addition to mortgages, car loans and personal loans are also amortizing for a term set in advance, at a fixed interest rate with a set monthly payment. The terms vary depending on the asset. Most conventional home loans are 15- or 30-year terms. Car owners often get an auto loan that will be repaid over five years or less. For personal loans, three years is a common term.

If you are looking to take out a loan, besides using a loan amortization schedule, you can also use an amortization calculator to estimate your total mortgage costs based on your specific loan.

Formulas Used in Amortization Schedules

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. There are specific formulas that are used to develop a loan amortization schedule. These formulas may be built into the software you are using, or you may need to set up your amortization schedule from scratch.

If you know the term of a loan and the total periodic payment amount, there is an easy way to calculate a loan amortization schedule without resorting to the use of an online amortization schedule or calculator. The formula to calculate the monthly principal due on an amortized loan is as follows:

Principal Payment = Total Monthly Payment – [Outstanding Loan Balance x (Interest Rate / 12 Months)]

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% (or 0.00375), so the resulting equation is $250,000 x 0.00375 = $937.50. The result is the first month's interest 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 which is allocated to the principal. You can repeat these steps until you have created an amortization schedule for the full life of the loan.

An Easier Way to Calculate an Amortization Schedule

Calculating an amortization schedule is as simple as entering the principal, interest rate, and loan term into a loan amortization calculator. But you can also calculate it by hand if you know the rate on the loan, the principal amount borrowed, and the loan term.

Amortization tables typically include a line for scheduled payments, interest expenses, and principal repayment. If you are creating your own amortization schedule and plan to make any additional principal payments, you will need to add an extra line for this item to account for additional changes to the loan's outstanding balance.

How to Calculate the Total Monthly Payment

Typically, the total monthly payment is specified by your lender when you take out a loan. However, if you are attempting to estimate or compare monthly payments based on a given set of factors, such as loan amount and interest rate, you may need to calculate the monthly payment as well.

If you need to calculate the total monthly payment for any reason, the formula is as follows:

Total Monthly Payment = Loan Amount [ i (1+i) ^ n / ((1+i) ^ n) - 1) ]

where:

  • i = monthly interest rate. You'll need to divide your annual interest rate by 12. For example, if your annual interest rate is 6%, your monthly interest rate will be .005 (.06 annual interest rate / 12 months).
  • n = number of payments over the loan’s lifetime. Multiply the number of years in your loan term by 12. For example, a 30-year mortgage loan would have 360 payments (30 years x 12 months).

Using the same example from above, we will calculate the monthly payment on a $250,000 loan with a 30-year term and a 4.5% interest rate. The equation gives us $250,000 [(0.00375 (1.00375) ^ 360) / ((1.00375) ^ 360) - 1) ] = $1,266.71. The result is the total monthly payment due on the loan, including both principal and interest charges.

30-Year vs. 15-Year Amortization Table

If a borrower chooses a shorter amortization period for their mortgage—for example, 15 years—they will save considerably on interest over the life of the loan, and they will own the house sooner. That's because they'll make fewer payments for which interest will be amortized. Additionally, interest rates on shorter-term loans are often at a discount compared to longer-term loans.

There is a tradeoff, however. A shorter amortization window increases the monthly payment due on the loan. Short amortization mortgages are good options for borrowers who can handle higher monthly payments without hardship; they still involve making 180 sequential payments (15 years x 12 months).

It's important to consider whether or not you can maintain that level of payment based on your current income and budget.

Using an amortization calculator can help you compare loan payments against potential interest savings for a shorter amortization to decide which option suits you best. Here's what a $500,000 loan with a 6% interest rate would look like, with a hypothetical 30-year and 15-year schedule to compare:

30-Year Amortization Schedule
Month 1 Month 2 Month 3 ... Month 360
Total Payment $2,998 $2,998 $2,998 ... $2,998
Principal Payment $498 $500 $503 ... $2,983
Interest Payment $2,500 $2,498 $2,495 ... $12
Interest to Date $2,500 $4,998 $7,493 ... $579,191
Outstanding Loan Balance $499,502 $499,002 $498,499 ... $0.00
15-Year Amortization Schedule
Month 1 Month 2 Month 3 ... Month 180
Total Payment $4,219 $4,219 $4,219 ... $4,219
Principal Payment $1,719 $1,728 $1,737 ... $4,198
Interest Payment $2,500 $2,491 $2,483 ... $21
Interest to Date $2,500 $4,991 $7,474 ... $259,471
Outstanding Loan Balance $498,281 $496,663 $494,816 ... $0.00

Refinancing from a 30-year loan to a 15-year mortgage could save you money on interest charges but whether it does or not depends on how much of the original loan's interest you've already paid off.

What Is a 30-Year Amortization Schedule?

An 30-year amortization schedule breaks down how much of a level payment on a loan goes toward either principal or interest over the course of 360 months (e.g., on a 30-year mortgage). Early in the life of the loan, most of the monthly payment goes toward interest, while toward the end it is mostly made up of principal. It can be presented either as a table or in graphical form as a chart.

What Are the Benefits of an Amortizing Loan?

Amortized loans feature a level payment over their lives, which helps individuals budget their cash flows over the long term. Amortized loans are also beneficial in that there is always a principal component in each payment, so that the outstanding balance of the loan is reduced incrementally over time.

What Are the Downsides of an Amortizing Loan?

The main drawback of amortized loans is that relatively little principal is paid off in the early stages of the loan, with most of each payment going toward interest. This means that very little home equity is being built up early on, which is unhelpful if you want to sell a home after just a few years.

The Bottom Line

Understanding the loan amortization schedule on a loan you are considering or a loan you already have can help you see the big picture. By comparing the amortization schedules on multiple options you can decide what loan terms are right for your situation, what the total cost of a loan will be, and whether or not a loan is right for you. If you are trying to pay down debt, comparing the amortization schedules on your existing loans can help you determine where to focus your payments.

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  1. Consumer Financial Protection Bureau. "How does paying down a mortgage work?"