Many people choose to finance the purchase of a piece of real estate with a loan. But as people begin to make loan payments, many don't realize that a majority of their monthly payment is actually going to pay for the interest on the loan and not the principal. It's only after the lender has received most of its money that the borrower really starts making a dent in the loan. To see exactly how much of your payment is going to the principal and how much is going toward interest, you want to create an amortization schedule, which shows that information. You just need a few simple variables to do it.
Things You'll Need
- Mortgage calculator
Gather the variables of your loan. This includes the monthly payment, interest rate and term of your loan.
Create a table for your amortization schedule. In the first column, list each payment period for the loan. In the next column list the amount of the monthly payment for that payment period. As an example, say that a couple obtained a loan for $300,000 at 6 percent fixed for thirty years. The first column would be numbered 1 to 360 because there are 360 months in 30 years. The second column would list $1,798.65 for all 360 payments as that would be the payment on the example loan. (Use the loan calculator listed below to calculate your payments)
Create three more columns on your table. One each for Principal, Interest and Principal Owed.
Turn the interest rate on your loan into a monthly interest rate in decimal form. For instance, in the example, the interest rate is 6%. Written in decimal form, that is .06. Now, you need to find how much interest is being paid per month because the example loan uses monthly payments. So the equation is:
.06 / 12 = .005
This is the monthly interest rate for the example loan.
Calculate the amount of principal and interest that is being paid each month. The equation is the following:
Principal x Monthly Interest Rate = Interest Paid
Using the example the equation is the following:
300,000 x 0.005 = $1,500
This means that $1,500 of the $1,798.65 monthly payment was actually interest.
Plug the new values that you've found ($1,500 interest and $298.65 principal) into your amortization schedule next to the first payment month. Subtract $298.65 from the balance of the loan and place that in the final column. The answer is $299,701.35
Repeat this calculation until you've completed the amortization schedule. In the example you would perform this calculation another 359 times until the schedule is complete. Remember that each time you are filling out your table, you are reducing the principal balance. So the calculation for the second month would be the following:
$299,701.35 x 0.005 = $1,498.51
This would mean that $1,498.51 went to interest and $300.14 went to principal.
- Photo Credit home sweet home image by David Dorner from Fotolia.com
How to Use a Simple Interest Amortization Schedule
A simple interest amortization schedule is used for analyzing simple interest on large loans such as car loans or mortgages. They are...