What Is an Amortization Chart?
When you have a fixed-payment loan, such as a mortgage or a car loan, the way the debt is paid off is called amortization. Understanding your amortization schedules is important to understanding your financial situation.
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Function
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A fixed-payment loan has an amortization schedule that is based on the amount of the loan, the term or length of the payment schedule and the interest rate. The monthly payment is the result of these three factors.
Effects
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Each loan payment is part interest paid to the lender and part reduction of the balance of the loan principal. An amortization chart shows how much of each payment will go toward interest and principal during the term of the loan.
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Time Frame
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Initially, a larger portion of each payment goes to pay interest because most loans are front-loaded, meaning most of the interest is paid during the first part of the loan term. As payments progress, more of each payment goes toward the principal.
Example
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For example, a 30-year loan for $100,000 with an interest rate of 6 percent would have a fixed monthly payment of approximately $600. In the first year, $500 of the payment would go to interest and only $100 would go to pay down principal. By the 10th year, $180 of each payment goes to reduce the principal balance, and by the 20th year, more than half the payment goes to principal.
Potential
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Making additional payments early in a loan can reduce the term significantly. In the example above, doubling the principal each month for one year and paying an extra $1,228 would reduce the loan's term by one year and save more than $6,000 in total payments. If you continued to pay that extra $100 toward the principal, you would reduce the loan term by almost nine years.
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