Amortization Table – Calculate Your Own the Quick and Easy Way
Within the world of finance is a world of borrowing because using other people’s money is how regular people get started in big business.
Borrowing is also how people who don’t happen to have $400,000 at their disposal buy nice new homes in nice neighborhoods. Without mortgages, very few people would own homes and the middle class wouldn’t exist, as there would be two classes of people, the homeowners and those who rented from them.
The most important part of borrowing is knowing how much money you are paying back to the lender and how much money you are wasting on interest. Central to this knowledge is the understanding of what an amortization table is and how to use it.
In this article not only will we discuss these two things, but also you will truly be taught how to build an amortization table and we will calculate one as we go along.
What will the table tell us?
The first step to calculating an amortization table is the understanding of what the table will tell us. In short, amortization tables break monthly payments into two parts, the principal paid and the interest paid. So, it would behoove us if we knew what the total monthly payment was to begin with.
I know, it probably sounds like a cop out because we could calculate the payment, but that part of the equation will be left for another article. Here, we’re going to go to a financial or mortgage calculator and find out the payment. Then, we will do the calculations to break the payment down into its two parts.
Let’s start by using an example. In this example, the numbers may sound disinctive but we are going to use numbers that will make the example easy to follow. So, let’s say we have a mortgage with a rule of $360,000. The mortgage will be paid off over 30 years, or 360 monthly payments. The interest rate will be a 1970’s kind 12%.
Interest calculation formula
Now, we will see how much interest we will pay on the first payment. First we will take the amount of principal we have left to pay. In this case it will be the whole mortgage of $360,000. We need to divide it by the number of months we have left to pay because we are building a monthly amortization table. This will tell us the amount we are paying interest on for one month.
Next, we want to multiply this amount by one month’s interest. One month’s interest will be found by dividing the yearly interest rate by 12. Then we have to multiply this amount by the number of months left to pay on the mortgage, in this case 360. If we didn’t do this, we would just be seeing the amount of interest that would be paid if there were only one month left to pay the mortgage.
Simplify the formula
Here’s how that formula looks: Int. on month’s payment=principal left/ number of months left x monthly interest x number of months left. Now, if you look at the formula you will see the term “number of months left” twice. Once it is a numerator (above the line) and once it is a denominator (below the line). This method we can divide it by itself. So, the formula now looks like: Int. on month’s payment=principal left x monthly interest. Pretty easy, huh!
Now, let’s build our amortization table. $360,000 x .01= $3,600. This is the interest paid the first month. Not sure where the .01 came from? It is 12%, or .12, which is the yearly interest rate divided by 12 giving us the monthly interest rate.
Next, we take the monthly payment we got from a mortgage calculator, which is $3,703.01, and we know the interest on the first payment is $3,600 so we will subtract it from $3,703.01, which will tell us the principal part of the first payment is $103.01. This is the first entry in our amortization table. $3,6000 interest and $103.01 principal.
At this point, we know we no longer owe $360,000 on the mortgage because we have paid $103.01, so the principal left is now $360,000 – $103.01, or $359,896.99. We now multiply this number by .01 to get the interest part of the second payment. This is $3,598.97 and, since we know the total payment is $3,703.01, we will subtract $3,598.97 from it to get $104.04 which is the principal paid on the second payment.
There you have it. You just continue calculating in this way for another 358 payments and you will have built your amortization table completely by hand. This, by the way, is something few people can say!
already if you don’t continue on making these calculations, you now know, from a very inside perspective, exactly what amortization is all about!