What is an Amortization Schedule?
An amortization schedule is a detailed table showing each loan payment breakdown - how much goes to principal vs interest. It reveals the true cost of borrowing over time and helps plan payoff strategies. Understanding amortization is essential for making informed borrowing decisions.
Understanding the Schedule
Each payment has two parts: Interest portion (calculated on remaining balance) and Principal portion (reduces the loan balance). Early payments are mostly interest because the balance is high. Later payments are mostly principal as the balance decreases. Total payment stays the same for fixed-rate loans.
The Amortization Formula
Monthly Payment = P x [r(1+r)^n] / [(1+r)^n - 1]. P = Principal, r = monthly interest rate (annual rate/12), n = total number of payments. Example: $200,000 mortgage at 6% for 30 years. r = 0.06/12 = 0.005, n = 360. Monthly payment = $1,199.10.
Sample Amortization
Payment 1: $1,199 total, $1,000 interest, $199 principal. Balance: $199,801. Payment 60 (Year 5): $1,199 total, $928 interest, $271 principal. Balance: $184,398. Payment 180 (Year 15): $1,199 total, $716 interest, $483 principal. Balance: $118,529. Payment 360 (Year 30): $1,199 total, $6 interest, $1,193 principal. Balance: $0.
Strategic Payoff Tips
Make extra payments early in the loan to maximize interest savings. Even one extra payment per year can shave years off your mortgage. Target principal-only payments. Refinance to shorter terms only if break-even makes sense. Always verify extra payments are applied to principal.
Key Takeaways
Amortization shows payment breakdown over time. Early payments are mostly interest. Extra payments early save more interest. Review your schedule before signing any loan. Use our Amortization Calculator to see your full schedule.