SL 2: How Amortization Schedules Work
amortization is how much each month to reduce our loan to zero
During the first few years of the loan,
the monthly payment will be almost entirely interest with a little amount left over to repay the principal. But as time goes on, more of the payment will repay the principal amount and less on the interest.
View this illustration of a 360-month amortization schedule for $100,000 borrowed at 6%:
|Month||Starting Balance||Monthly Payment||Interest Paid||Principal Paid||Ending Balance|
In this example:
An amortization schedule is calculated that shows that the borrower must pay $599.55 each month for 360 months in order to meet the interest obligation and to pay down the borrowed amount to $0 over 30 years.
The interest charges for the first month is calculated as such:
$100,000 X 6% (divided by) 12 months = $500.00
In the first payment, the borrower pays the lender $500.00 in interest. The remaining amount of $99.55 will repay the loan and reduce the borrowed amount to $99,900.45.
The interest charges for the second month is calculated as such:
$99,900.45 X 6% (divided by) 12 months = $499.50
In the second payment, the borrower pays the lender $499.50 in interest. The remaining amount of $100.05 will repay the loan balance and reduce the borrowed amount to $99,800.40.
This will continue all the way through the 360th payment, where the borrower pays the lender $2.98 in interest. The remaining amount of $595.57 will repay the loan balance and reduce the borrowed amount to $0. The loan obligation has been paid off.