Amortization Schedule: How to calculate monthly mortgage payments?

What is an Amortization Schedule?

An amortization schedule is a table detailing each periodic payment on an amortizing loan (typically a mortgage), as generated by an amortization calculator. Amortization refers to the process of paying off a debt (often from a loan or mortgage) over time through regular payments.

A portion of each payment is for interest while the remaining amount is applied towards the principal balance. The percentage of interest versus principal in each payment is determined in an amortization schedule.

The schedule differentiates the portion of the payment that belongs to interest expense from the portion used to close the gap of a discount or premium from the principal after each payment. While a portion of every payment is applied towards both the interest and the principal balance of the loan, the exact amount applied to the principal each time varies (with the remainder going to interest).

An amortization schedule indicates the specific monetary amount put towards interest, as well as the specific amount put towards the principal balance, with each payment. Initially, a large portion of each payment is devoted to interest. As the loan matures, larger portions go towards paying down the principal.

Key Takeaways

  • An amortization schedule is a table that shows each periodic loan payment that is owed, typically monthly, and how much of the payment is designated for the interest versus the principal.
  • Amortization tables can help a lender 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.
  • Amortization schedules are often seen when dealing with installment loans that have known payoff dates at the time the loan is taken out, such as a mortgage or a car loan.
amortization schedule

Understanding an 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. Take, for example, an amortization schedule for a $250,000, 30-year fixed-rate mortgage with a 4.5% interest rate. The first few lines look like this:

MonthMonth 1Month 2Month 3
Total Payment$1,266.71$1,266.71$1,266.71
Principal Payment$329.21$330.45$331.69
Interest Payment$937.50$936.27$935.03
Interest to Date$937.50$1,873.77$2,808.79
Outstanding Loan Balance$249,670.79$249,340.34$249,008.65

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

Methods of amortization

There are different methods used to develop an amortization schedule.

1. Straight-line amortization

With the straight-line amortization, the size of the principal payment is the same for every payment. It is computed by dividing the amount of the original loan by the number of payments. Since the remaining principal decreases after each payment, with a fixed interest rate, the interest payment also goes down for each payment. Thanks to its simplicity this method is very popular in accounting and financial modeling.

For example, with a loan of $400 scheduled to be paid back in 4 years at a 10% interest rate, the amortization schedule using the straight-line method is illustrated in the table below. Note that the principal payment is always the same but the interest payment goes down for each payment.

2. Annuity method

With the annuity method, the size of the total payment is the same for every payment. Using this method, the amortization schedule consists of decreasing interest payments and increasing principal payments. This type of amortization is very popular for a home mortgage.

Using the above example, the amortization schedule using the annuity method is illustrated in the table below. We can see that the total payments stay fixed.

3. Other methods

Other types of amortizations include:

  • Declining balance
  • Bullet (all at once)
  • Balloon (amortization payments and large end payment)
  • Increasing balance (negative amortization)

Amortization schedules run in chronological order. The first payment is assumed to take place one full payment period after the loan was taken out, not on the first day (the origination date) of the loan. The last payment completely pays off the remainder of the loan. Often, the last payment will be a slightly different amount than all earlier payments.

In addition to breaking down each payment into interest and principal portions, an amortization schedule also indicates interest paid to date, principal paid to date, and the remaining principal balance on each payment date.

How do you calculate amortization?

An amortization schedule calculator shows:

  • How much principal and interest are paid in any particular payment.
  • How much total principal and interest have been paid at a specified date.
  • How much principal you owe on the mortgage at a specified date.
  • How much time you will chop off the end of the mortgage by making one or more extra payments.

This means you can use the mortgage amortization calculator to:

  • Determine how much principal you owe now, or will owe at a future date.
  • Determine how much extra you would need to pay every month to repay the mortgage in, say, 22 years instead of 30 years.
  • See how much interest you have paid over the life of the mortgage, or during a particular year, though this may vary based on when the lender receives your payments.
  • Figure out how much equity you have.

How do I calculate monthly mortgage payments?

Here’s a formula to calculate your monthly payments manually: M= P[r(1+r) ^n/((1+r) ^n)-1)]

  • M = the total monthly mortgage payment.
  • P = the principal loan amount.
  • r = your monthly interest rate. Lenders provide you an annual rate so you’ll need to divide that figure by 12 (the number of months in a year) to get the monthly rate. If your interest rate is 5 percent, your monthly rate would be 0.004167 (0.05/12=0.004167).
  • n = number of payments over the loan’s lifetime. Multiply the number of years in your loan term by 12 (the number of months in a year) to get the number of payments for your loan. For example, a 30-year fixed mortgage would have 360 payments (30×12=360).