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
|
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
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
1st
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
2nd 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.
