An amortization table is a chart that details the allocation of a borrower's periodic payments toward her loan's principal and interest, and illustrates how the balance due decreases over time as payments are applied. An amortization table should include a list of all required payments, the dates they’re due, and the amount of each payment that goes toward the principal and interest balances. It also should include a running balance of the loan once each payment has been applied. A consumer can easily draw up an amortization table using a computer spreadsheet, or by manual calculations. The amortization table is so named because it displays how the principal is amortized, or drawn down, over the life of the loan. In fact, the word’s root is Latin for “to kill,” so to amortize a loan is to kill, or pay, it off.
When money is loaned, the amount loaned is called the principal, and the borrower agrees to pay back the entire principal, plus an additional amount called interest, which is the cost of borrowing the money. Interest is usually expressed as a percentage of the principal on an annual basis, i.e. 5% annual interest. Loan payments are usually made on a monthly basis, and include both an amount paid toward the principal, and an amount that pays the interest currently due on the loan. The interest included in the monthly loan payment is 1/12 of the annual interest due on the loan’s current outstanding balance. With every payment that’s made, the principal amount is reduced, so that the interest due with the next payment will be smaller.
Amortization tables are created based on a formula that uses the principal, the interest rate and the number of periodic payments to determine a consistent monthly payment that remains the same throughout the life of the loan even as its component elements keep changing. When borrowers create their own amortization tables, they can include both the required payments made to both principal and interest, as well as voluntary additional amounts paid toward the principal. The amortization tables provided by lenders often don’t reflect such additional payments, and so may be inaccurate for planning purposes.
An amortization table provided by a lender for a standard mortgage loan will generally note in its header the amount borrowed, the annual interest rate, the number of payments to be made and the day of the month they’re due. For a traditional 30-year loan, the table itself should list all 360 payments. One column should list the dates on which the payments are due, and there may be another column numbering the payments from 1 to 360. The remaining columns will list the principal payment due, the interest payment due, the total of the monthly payment, and the remaining principal due on the loan, after the monthly principal payment is applied. There may be other columns, as well; if the loan provides for the borrower to make insurance and tax payments through the lender, for example, these amounts may also be included in the table, although technically speaking, they have nothing to do with amortizing the loan.
Amortization tables can be used by consumers to calculate plans of mortgage prepayment. Some banks or third parties offer costly programs to borrowers to accelerate their payments with the goal of reducing the total amount of interest they’ll pay over the life of the loan. In fact, consumers can develop such plans on their own and simply add money to each loan payment and specify that it’s to be applied to principal. Even small amounts routinely added to periodic payments can result in significant savings in interest paid over the life of a typical real estate loan. Some loans regulate or penalize prepayments, though, and loan documents should be carefully reviewed before embarking on any loan acceleration program.
