How to Calculate Amortization Schedule
What is Amortization Schedule?
An amortization schedule breaks down every loan payment into its principal and interest components over the full loan term. It shows exactly how much of each payment reduces the balance versus paying interest.
Formula
Payment = P × [r(1+r)ⁿ] / [(1+r)ⁿ − 1]
Step-by-Step Guide
- 1Calculate fixed monthly payment using the annuity formula
- 2Month 1 interest = balance × monthly rate; principal = payment − interest
- 3New balance = previous balance − principal; repeat until balance = 0
Worked Examples
Input
$250,000 loan · 6% annual rate · 30 years
Result
Monthly payment = $1,498.88 · Total interest paid = $289,595
In month 1 only $248.88 of $1,498.88 reduces the principal balance
Common Mistakes to Avoid
- ✕Comparing APR vs note rate when calculating payments
- ✕Forgetting taxes and insurance in total housing cost
- ✕Ignoring prepayment penalties when planning extra payments
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