How to Read an Amortization Schedule

When you go to get a morgage, your lender will present you with a table of numbers detailing each payment over time. This is the amortization schedule, and it details how much of each payment goes to principal and how much to interest, along with related figures. The amount going to interest and principal will vary over time, with a large portion of early payments going to interest. The portion of each payment going to interest will decrease over time, however.

Because loan payments are structured in this way, equity, that is, the amount of value your home has above the principal loan value, grows quite slowly at first. An amortization schedule can tell you, with a relatively simple calculation, just how much equity you will have over time, given a stable home price.

Here is an example of a three-month amortization schedule for a 30-year loan of $100,000 at 8% interest:

Payment Principal Interest Cum. Principal Cum. Interest Balance

1 67.09 666.67 67.09 666.67 99932.91

2 67.54 666.22 134.63 1332.89 99865.37

3 67.99 665.77 202.62 1998.66 99797.38

The “Payment” column states which payment in the sequence of payments (in this case, out of 360), the corresponding row represents. The “Principal” column tells how much of each payment goes to principal. The “Interest” column tells how much of each payment. You can see how the principal payment increases by a tiny fraction each month, while the interest rate decreases by the same amount. In this case, the amount going to principal will not exceed the amount going to interest until payment 257 in the 21st year of the loan. Lower interest rates would result in this occurring earlier. For instance, if the interest rate were 5%, the principal amount would exceed the interest at payment 195, 16 years into the loan.

“Cumulative Principal” tells you how much total principal you have paid once that payment is made. Similarly, “Cumulative Interest” shows the total amount of interest paid. Finally, “Principal Balance” shows how much of the actual money loaned is still owed back. The principal balance will decrease at an accelerating rate over the life of the loan. The total amount of each monthly payment is omitted, because this doesn’t change. In this case, the total monthly payment is 733.76.

Not all mortgages follow this pattern. For instance, interest-only loans allow a borrower to make only interest payments for the first 5 or 10 years. This payment does not decrease because the principal amount does not increase. However, calling a chart of such a loan an amortization chart would be something of a misnomer, because technically amortization refers to the reduction of loan principal over time. Another form of loan that was once used was the negative amortization loan, where the borrower actually paid less than the interest alone, and the remainder was added to the balance. Both of these types of loans, but particularly the latter, have become very rare since the subprime fiasco and collapse in recent years.

With the knowledge of how to understand your amortization schedule, you will be able to make truly educated decisions about what taking out a loan would mean to you, how much of your house you’ll actually own at any particular time, and the implications of such decisions as refinancing. Purchasing a home is a big decision, and it’s important to be able to plan ahead. Understanding your amortization schedule won’t keep surprises from happening, but it’s definitely an important step.

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