An amortization schedule is a timetable of periodic loan payments. Its purpose is to provide ease of viewing the required minimum monthly payments. It breaks down the principal amount, interest, and total balance so borrowers may see how much their total loan balance is after their payment.
Furthermore, borrowers can see where their payments are going. Most of the first payments go to the interest but through time, it diminishes and more percentage of the payment goes to the principal amount.
When is an amortization schedule applicable?
Only borrowers who are paying on installment basis can utilize an amortization schedule. It’s basically an illustration of numbers that help in calculating the next month’s interest and principal payments based on the time agreed for the loan to be paid off completely.
Oftentimes, borrowers manually compute their mortgage using the term of their loan, the interest rate, and the monthly payment. The computation begins with the first payment for the first month. That amount is multiplied by the loan balance and the periodic interest rate which is one-twelfth of the set interest rate.The total result is the interest rate for the first month.
This result is the number you should deduct from the periodic payment so the borrower can get the amount that should be paid to the principal loan balance. For the succeeding months, the same process can be used to complete the amortization schedule.