Amortization is the reduction of a debt over time as regular payments are made. Interest on a loan is generally compounded monthly, which means that the amount owed increases over time. The monthly payments cover the interest accrued in the current month and part of the principal; in this way, at the end of the period established for the loan, the balance due is equal to 0. The calculation of the amortization requires quite complicated mathematical calculations, but if you understand what you are paying with each monthly payment, and if the interest rate is fixed, you can calculate the depreciation and create the related plan using simple arithmetic calculations.
Steps
Step 1. Obtain the principal of the loan (the amount initially borrowed), the interest rate, the term of the loan in months and the amount of the monthly payment from your loan agreement
Make a note of these amounts.
Step 2. Divide the interest rate by 12 to determine the monthly interest rate
Multiply the monthly rate by the principal to get the amount of interest earned in the first month.
Step 3. Subtract the interest portion from the monthly payment to determine the principal amount you paid with the first installment
Step 4. Subtract the principal amount paid with the first installment from the initial capital to obtain the remaining balance
Step 5. Calculate the second month's interest rate amount using the remaining principal
Step 6. Subtract the interest portion of the second installment from the monthly payment to obtain the principal amount paid with the second installment
Step 7. Subtract the principal amount paid with the second installment from the remaining principal to obtain the balance of the second month
Step 8. Build a table to keep track of the numbers as you calculate them
This table could get very long, as you will need to add a row for each installment. In the case of a 30-year loan, the table will reach 360 rows!
Step 9. Continue to calculate the amount of the interest rate and the principal amount for each installment, subtracting the principal amount relating to the installment from each remaining balance
Advice
- Instead of doing the calculations yourself, you can put the principal, interest rate, and loan term figures into a program that performs the mortgage calculations. Many corporate websites of banks or financial companies contain tools that allow you to calculate the mortgage. Although they are designed to give you an idea of the monthly payment amount, some of them also display an amortization table.
- Search the internet for a spreadsheet that allows you to create your own amortization plan. It's also possible that you create such a spreadsheet yourself, if you know how to use formulas.
- You will notice that the longer the loan term, the more interest you will have to pay. If you can afford higher monthly payments, decide to schedule additional payments related to the principal amount, or opt for a shorter period, it will result in substantial savings.
