To calculate the next month’s interest and principal payments, subtract the principal payment made in month one ($) from the loan balance ($250,000) to get the new loan balance ($249,), and then repeat the steps above to calculate which portion of the second payment is allocated to interest and which is allocated to the principal. You can repeat these steps until you have created an amortization schedule for the full life of the loan.
Calculating a loan amortization schedule is as simple as entering the principal, interest rate, and loan term into a loan amortization calculator. But you can also calculate it by hand if you know the rate on the loan, the principal amount borrowed, and the loan term.
Amortization tables typically include a line for scheduled payments, interest expenses, and principal repayment. If you are creating your own amortization schedule and plan to make any additional principal payments, you will need to add an extra line for this item to account for additional changes to the loan’s outstanding balance.
How to calculate the total monthly payment
Typically, the total monthly payment is specified by your lender when you take out a loan. However, if you are attempting to estimate or compare monthly payments based on a given set of factors, such as loan amount and interest rate, you may need to calculate the monthly payment as well.
- i = monthly interest rate. You’ll need to divide your annual interest rate by 12. For example, if your annual interest rate is 6%, your monthly interest rate will be .005 (.06 annual interest rate / 12 months).
- n = number of payments over the loan’s lifetime. Multiply the number of years in your loan term by 12. For example, a 30-year mortgage loan would have 360 payments (30 years x 12 months).
Using the same example from above, we will calculate the monthly payment on a $250,000 loan with a 30-year term and a 4.5% interest rate. The equation gives us $250,000 [(0.00375 (1.00375) ^ 360) / ((1.00375) ^ 360) – 1) ] = $1,. The result is the total monthly payment due on the loan, including both principal and interest charges.
15-Year Amortization Table
If a borrower chooses a shorter amortization period for their mortgage-for example, 15 years-they will save considerably on interest over the life of the loan, and they will own the house sooner. That’s because they’ll make fewer payments for which interest will be amortized. Additionally, interest rates on shorter-term loans are often at a discount compared to longer-term loans.
There is a tradeoff, however. A shorter amortization window increases the monthly payment due on the loan. Short amortization mortgages are good options for borrowers who can handle higher monthly payments without hardship; they still involve making 180 sequential payments (15 years x 12 months).
It’s important to consider whether or not you can maintain that level of payment based on your current income and budget. Using a 15-year amortization calculator can help you compare loan payments against potential interest savings for a longer amortization to decide which option suits you best. Here’s what the same $250,000 loan example mentioned earlier looks like, with a 15-year amortization instead.
Refinancing from a 30-year loan to a 15-year mortgage could save you money on interest charges but whether it does or not depends on how much of the original loan’s interest you’ve already paid off.
The Bottom Line
Understanding the loan amortization schedule on a loan you are considering or a loan you already have can help you see the big picture. By comparing the amortization schedules on multiple options you can decide what loan terms are right for your situation, what the total cost of a loan will be, and whether or not a loan is right for you. If you are trying to pay down debt, comparing the amortization schedules on your existing loans can help you determine where to focus your payments.
To illustrate, imagine a loan has a 30-year term, a payday loans no credit check Chattanooga 4.5% interest rate, and a monthly payment of $1,. Starting in month one, multiply the loan balance ($250,000) by the periodic interest rate. The periodic interest rate is one-twelfth of 4.5% (or 0.00375), so the resulting equation is $250,000 x 0.00375 = $. The result is the first month’s interest payment. Subtract that amount from the periodic payment ($1, – $) to calculate the portion of the loan payment allocated to the principal of the loan’s balance ($).
