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What is an Amortization Schedule?
An Amortization Schedule is a loan payment calculator that helps you keep track of loan payments and accumulated interest. Use LawDepot’s template to generate a custom table that details:
- Payment due dates and amounts
- Principal payments (i.e., the amount paid toward debt, minus interest)
- Interest charged per payment, plus total interest charged over time
- The remaining balance after each payment
An Amortization Schedule is generally used in situations that require larger loan amounts, such as for mortgages, business operations, or large asset purchases (e.g., heavy-duty equipment or vehicles).
An Amortization Schedule is also known as a:
- Loan Amortization Schedule
- Mortgage Amortization
- Loan Payment Schedule
How does amortization work?
Amortized loans separate the payments for the original debt (i.e., the principal) and interest (calculated as a percentage of the balance owed) over the length of the loan agreement.
When scheduling recurring payments, the total expense remains the same each time. However, the amounts from each payment that go toward the principal or interest will differ over the loan term.
Initially, the borrower pays more in interest. But, as time goes on and they chip away at the principal amount, they pay less in interest and more towards the principal.
Consider the following example:
- A loan amount of $100,000
- Monthly payments of $899.93 over a 15-year period
- An interest rate of 7.25% compounded yearly
For the first payment of $899.93, $584.97 goes toward interest while $314.96 goes to the principal. With each debt repayment, the amount of interest charged lessens. As a result, the borrower pays more towards the principal. At the end of the loan term, the final payment of $899.93 would contribute $894.51 toward the principal and only $5.23 interest.
Why should I create an Amortization Schedule?
An Amortization Schedule benefits both the borrower and the lender of a loan because:
- The lender can assess risk, manage loans, project revenue, and ensure compliance.
- The borrower gains crucial information to help them make informed financial decisions, save on interest, and plan for the future.
For instance, the information in an Amortization Schedule can help someone paying off a mortgage quickly answer questions such as:
- How much of my mortgage payment is interest?
- How much of my mortgage payment goes to the principal?
Read more: Ways to Buy a Home Without a Mortgage
How to create an Amortization Schedule
Answer LawDepot’s user-friendly questionnaire to generate your custom document. The information you’ll need to complete your Amortization Schedule includes:
1. Payment details
Choose one of the following options for payment:
- A lump sum at the end of the term: includes the principal plus accumulated interest
- Regular payments: an amount paid periodically during the term, with any outstanding balance paid at the end of the term
- Payments to principal and interest: payments go to both the principal and interest, so no balance remains at the end of the term
- Payments to interest only: regular payments go toward interest, and the borrower repays the principal at the end of the term
2. Term length
State when the money will be loaned and when it must be repaid.
3. Note amount
State the amount of money being lent, the interest rate, and whether interest is compounded every month, six months, or year.
4. Payment plan
Specify how often payments must be made and the day each payment is due (e.g., Payments will begin on January 15th, 2023 and continue on the 15th of each following month).
