Amortization means reducing debt over a period of time. The period is the time for which loan is taken. The installments consist of Principal and Interest. As the time passes with regular payment of installments, the Principal decreases and at the end it is $ 0. The calculation requires a lot of math but is easy.
– Step 1 First write down the Principal Amount, Interest rate and tenure of the Loan. We will try to understand with help of an example. Principal: $100,000; Interest rate: 6% Annual; Tenure: 360 Months (12 Years). Also know your Installment from the schedule here it is $ 599.55
– Step 2 Then we calculate the monthly interest rate. Just divide the Annual rate by number of years. Here it will be 6% divided by 12 that is 0.5% = 0.005 the interest part paid in first month will be $100,000 x 0.005 = $500.
– Step 3 Subtract the interest part from the installment to get the Principal payment in the first Month. Here it would be $599.55 – $500 = $99.55.
Now you can subtract the Principal paid from initial Principal which is $100,000 – $99.55 = $99,900.45.
– Step 4 Now just calculate the interest amount for next month by multiplying the interest rate with the remaining Principal. $99,900.45 x 0.005 = $499.50.
– Step 5 Now we can easily calculate the Principal paid in second month. It will be $599.55 – $499.50 = $100.05.The reaming Principal after second installment payment will be $99,900.45 – $100.05 = $99,800.40.Similarly all other calculations can be made.The period of the schedule will be for 360 months, and you can check each month. It is that simple
This is how an Amortization schedule is made by the bank and you can keep a record on your computer on MS-Excel. It is very easy. The calculations here are just made to make you understand the basics behind making an Amortization schedule. Understand how are paying your loan back.