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.

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Amortization Schedule

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. 

Key Takeaways

  • An amortization schedule is a complete table of periodic loan payments that shows the amounts of principal and interest that comprise each payment, until the loan is paid off at the end of its term.
  • Amortization schedules are common for installment loans that have known payoff dates at the time the loan is taken out, such as a mortgage or a car loan.

Understanding 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.

Special Considerations

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 own the house sooner. Also, interest rates on shorter-term loans are often at a discount compared with longer term loans. Short amortization mortgages are good options for borrowers who can handle higher monthly payments without hardship; they still involve making 180 sequential payments. It's important to consider whether or not you can maintain that level of payment.