Amortization Schedule - Example Amortization Schedule

Example Amortization Schedule

This amortization schedule is based on the following assumptions:

First, it should be known that rounding errors occur and depending how the lender accumulates these errors, the blended payment (principal + interest) may vary slightly some months to keep these errors from accumulating; or, the accumulated errors are adjusted for at the end of each year, or at the final loan payment.

There are a few crucial points worth noting when mortgaging a home with an amortized loan. First, there is substantial disparate allocation of the monthly payments toward the interest, especially during the first 18 years of the mortgage. In the example above, payment 1 allocates about 80-90% of the total payment towards interest and only $67.09 (or 10-20%) toward the Principal balance. The exact percentage allocated towards payment of the principal depends on the interest rate. Not until payment 257 or 21 years into the loan does the payment allocation towards principal and interest even out and subsequently tip the majority of the monthly payment toward Principal balance pay down.

Second, understanding the above statement, the repetitive refinancing of an amortized mortgage loan, even with decreasing interest rates and decreasing Principal balance, can cause the borrower to pay over 500% of the value of the original loan amount. 'Re-amortization' or restarting the amortization schedule via a refinance causes the entire schedule to restart: the new loan will be 30 years from the refinance date, and initial payments on this loan will again be largely interest, not principal. If the rate is the same, say 8%, then the interest/principal allocation will be the same as at the start of the original loan (say, 90/10). This economically unfavorable situation is often mitigated by the apparent decrease in monthly payment and interest rate of a refinance, when in fact the borrower is increasing the total cost of the property. This fact is often (understandably) overlooked by borrowers.

Third, the payment on an amortized mortgage loan remains the same for the entire loan term, regardless of Principal balance owed but only for a fixed rate, fully amortizing loan. For example, the payment on the above scenario will remain $733.76 regardless if the Principal balance is $100,000 or $50,000. Paying down large chunks of the Principal balance in no way affects the monthly payment, it simply reduces the term of the loan and reduces the amount of interest that can be charged by the lender resulting in a quicker payoff. To avoid these caveats of an amortizing mortgage loan many borrowers are choosing an interest-only loan to satisfy their mortgage financing needs. Interest-only loans have their caveats as well which must be understood before choosing the mortgage payment term that is right for the individual borrower.