Are You Paying Too much For Your Mortgage?

An amortization schedule, though one of the most important documents in a mortgage process, is still the most overlooked. Rarely do home loan or mortgage applicants take the time to speak with their bankers or their loan advisors to understand what an amortization schedule is and how it helps.

The word ‘Amortization’ is an accounting term that refers to the amount of principal and interest paid during the loan term.  The amortization schedule gives information about the number of installments paid, the breakup of the principal and interest paid, the principal paid and the balance outstanding. 

The Example

In order to understand this better let us take up an example.

Suppose you took a home where

Loan Amount - $10,00,000

Interest Rate – 12%

Term Period – 1 Year

And let’s say the banker tells you that this is how you are supposed to repay your loan

Number of Installments – 12

Monthly Installment - $88,849

The banker also gives you an amortization schedule that would look like this. 

The Amortization Schedule

No of Installments Paid	Installment Paid (A+B)	Principal Paid (A)	Interest Paid (B)	Principal Outstanding	% Principal Outstanding
1	$88,849	$78,849	$10,000	$9,21,151	7.88%
2	$88,849	$79,637	$9,212	$8,41,514	15.85%
3	$88,849	$80,434	$8,415	$7,61,080	23.89%
4	$88,849	$81,238	$7,611	$6,79,842	32.02%
5	$88,849	$82,050	$6,798	$5,97,792	40.22%
6	$88,849	$82,871	$5,978	$5,14,921	48.51%
7	$88,849	$83,700	$5,149	$4,31,221	56.88%
8	$88,849	$84,537	$4,312	$3,46,685	65.33%
9	$88,849	$85,382	$3,467	$2,61,303	73.87%
10	$88,849	$86,236	$2,613	$1,75,067	82.49%
11	$88,849	$87,098	$1,751	$87,969	91.20%
12	$88,849	$87,969	$880	$0	100

Understanding the Amortization Schedule 

After looking at this self-explanatory amortization schedule a question that might come up in your mind is that how is the Principal Paid(A) and the Interest(B) calculated.

To calculate the Interest we need to apply the following formula

Interest = (Principal*Rate*Time)/100

Principal = Principal Outstanding after paying last one’s installment

Rate = 12% (on an yearly basis)

Time = 1 month = 1/12 year

You will see that the rate and time will remain the same whereas the principal will change month on month 

1^st Installment

Interest = 10,00,000*12*(1/12)/100 = 10,000

Principal Paid = = $88,849 - $10,000 = $78,849

Principal Outstanding = $10,00,000 - $78,849 = $9,21,151

*Remember: This month’s outstanding principal will be next month’s principal

2^nd Installment

Interest = $9,21,151*12*(1/12)/100 = $9211.51

**For the sake of simplicity let us round it off and now the Interest is $9212

Principal Paid = Installment Paid – Interest Paid = $88,849 - $9212 = $79637

Principal Outstanding = $9,21,151 - $79637 = $841514

This is how you would go on calculating the interest paid for each month and also the principal outstanding.

At the end of 12 months you would see that Principal outstanding becomes 0 and you may then add up all the interest amounts paid to get the exact value of the total interest paid.

In this case the total interest paid comes out to $66,186

Word of advice

Whenever you take a mortgage loan do ask the lender to provide you the amortization schedule. This will not only tell you the exact interest amount you are paying on your loan but it would also help you to know the exact principal outstanding at any point in time during the loan period, in case you are planning to pre-close your loan.