How to Calculate Loan Amortization
Amortization is the process of paying down the interest portion of you loan. When you examine your mortgage bills, you will notice that even though your monthly payments are the same every month, the proportions devoted to principal and interest are different. More specifically, at the beginning of the loan period, a bigger percentage of your monthly payment goes to interest than at the end of the period. This gradual decrease of interest owed is called the "amortization schedule."
If you have paper, a pencil, and a calculator, you can compute an amortization table by hand, or you can make a spread sheet in Excel.
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Instructions
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First, you will need to know the principal of the loan, the monthly interest rate (annual rate divide by 12), the length of the loan, and the amount of the monthly payments.
For simplicity, let's use this easy example: principal = $1000, monthly interest rate = .5% = .005, loan length = 1 year, and thus the monthly payments = $86.07
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Now make a table with one row for each month, and 5 columns. One each for: month number, monthly payment, interest paid, principal paid, and remaining principle balance. See image.
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For the first month, the amount of interest you pay is .5% of the loan amount, so (.005)($1000) = $5. The principal you pay is $86.07 - $5 = $81.07. And finally, the remaining principal is $1000 - $81.07 = $918.93. See image.
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Next, during the second month the interest paid is .5% of the remaining balance. So (.005)($918.93) = $4.60. The principal paid is $86.07 - $4.60 = $81.47. And finally, the remaining principal balance is $918.93 - $81.47 = $837.46
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Repeat until you fill out the whole table. For longer loan periods, your bank or lending institution will make minor adjustments (of a few cents) due to rounding errors.
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Knowing your amortization schedule is helpful in case you decide to refinance your mortgage down the line.
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