You may think an amortization chart is something that only mortgage professionals can use. Or you may not even know what an amortization chart is. If you are wondering what good is an amortization chart, you aren’t alone.
An amortization chart is very useful to help understand the payment structure of a mortgage. This can be useful if you have a mortgage and are thinking of paying it down early. You can analyze the benefit of making extra payments to your mortgage with the help of an amortization chart.
It can also help you when you are looking into getting a new mortgage, either for a home purchase or a refinance. If you are shopping for a mortgage, you will want to be able to understand the costs involved both up front and over the term of the mortgage. An amortization chart can show you how much of each payment is going towards principal and how much will be paid in interest.
A basic amortization chart will use the principal amount (loan amount), the interest rate and the term (number of years to repay the loan). From these numbers it can calculate the monthly payment.
Take a look at this example:
Let’s say you get a $100,000.00 loan for a 30 year term at 8% APR interest. The loan payment would be calculated such that you are paying 1/12 of 8% of the remaining principal in interest each month, plus enough principal to pay off the loan over 360 months.
Each month you will pay less interest because the remaining balance is less. You will pay more towards the principal each month so the total monthly payment will remain the same. Here is an amortization chart showing the monthly payments:
| Payment | Principal | Interest | Balance |
| 1 | $67.10 | $666.67 | $99,932.90 |
| 2 | $67.55 | $666.22 | $99,865.36 |
| 3 | $68.00 | $665.77 | $99,797.36 |
| 4 | $68.45 | $665.32 | $99,728.91 |
| 5 | $68.91 | $664.86 | $99,660.01 |
| 6 | $69.36 | $664.40 | $99,590.64 |
| 7 | $69.83 | $663.94 | $99,520.82 |
| 8 | $70.29 | $663.47 | $99,450.52 |
| 9 | $70.76 | $663.00 | $99,379.76 |
| 10 | $71.23 | $662.53 | $99,308.53 |
| 11 | $71.71 | $662.06 | $99,236.82 |
| 12 | $72.19 | $661.58 | $99,164.64 |
| 13 | $72.67 | $661.10 | $99,091.97 |
| 14 | $73.15 | $660.61 | $99,018.82 |
| 15 | $73.64 | $660.13 | $98,945.18 |
| 16 | $74.13 | $659.63 | $98,871.05 |
| 17 | $74.62 | $659.14 | $98,796.42 |
| 18 | $75.12 | $658.64 | $98,721.30 |
| … | … | … | … |
| 358 | $719.28 | $14.48 | $1452.98 |
| 359 | $724.08 | $9.69 | $728.91 |
| 360 | $728.91 | $4.86 | $0.00 |
Each month you will pay $733.77, but the allocation of this payment towards interest and principal will vary each month. Over the first year you are paying between $67 to $72 each month towards reducing the remaining balance owed.
So you can see you are not paying down the balance very much for the beginning of the loan term. Keep this in mind if you are considering refinancing. It is best not to get a loan that you will need to refinance in the near future.
When I bought my Lake Forest condo, I had a loan that would start adjusting after 5 years. I followed the suggestion of a mortgage broker and accepted that option with the additional recommendation that I refinance before the fixed period ended.
Now that I have learned more about mortgages, I see that this was not very good advice. You should not get into any mortgage that you aren’t comfortable keeping over the long term.
It turns out that interest rates are lower now than they were at the time I got my mortgage, but nobody can predict what will happen in the future. It’s not likely that rates will get much lower than they are now.
You can avoid potentially expensive mistakes like this if you learn about the home buying process before you commit yourself to any long term financial decision. When it comes to one of the biggest financial decisions in your life, it is better to learn from the mistakes of others than to make your own.
Learn more about the home buying process in a free e-course. You can subscribe here:
Allen Davis
RealEstateSearchDirect.com
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Amortization charts are essentially static. Once they’re printed out they’re done. The benefit to them is, it’s designed with either a computer software or an online internet site. Since they’re constructed in this way almost instantaneously, they need no efforts on the user’s part.