Amortization Schedule for a Mortgage

What is the Amortization Schedule for a Mortgage?

Amortization Schedule for a mortgage is a tabular representation of periodic loan payments that shows how much this loan payment does into repayment of principal amount and how much is for the interest payment.

• Although all the periodic payments are of equal amount, the initial periodic payments in the schedule include a higher amount of interest. In contrast, the later periodic payments in the schedule are majorly comprised of principal payment.
• This variation in the mix of interest component and principal component occurs because, in a loan amortization schedule, the interest charged in the later periodic payments decreases as the outstanding loan depreciates owing to the payment of the principal component.
• Finally, the last line of the mortgage’s amortization schedule table displays the total amount paid in interest and principal during the entire tenure of the term loan.

Calculation of Periodic Payments

The primary component of the amortization table for a mortgage is the periodic payment, the principal payment, and the interest payment. The periodic payment is calculated as,

The formula for interest paid during a single period (between two successive periodic payments) is straightforward as given below,

Interest paid = Outstanding loan * Rate of interest

The principal component of the term loan in the periodic payment is calculated as,

Principal repayment = Periodic payment – Interest accrued

Explanation

The amortization schedule for a mortgage( in excel) can be derived in the following seven steps:

Step 1: Identify initially the outstanding loan amount, which is the opening balance.

Step 2: Then, figure out the rate of interest being charged for each period.

Step 3: Now determine the tenure of the loan amount, which is the remaining number of periods.

Step 4: Based on the available information, the amount of periodic payment can be computed with the above-given formula of the periodic payment.

Step 5: Now, the interest paid between two successive periodic payments is calculated by multiplying the outstanding principal with the interest rate being charged, which is,

Interest paid = Outstanding loan * Rate of interest.

Step 6: Now, since the periodic payment comprises of both interest and principal component, the principal component for the period is derived by deducting the interest accrued from the overall periodic payment, which is,

Principal repayment = Periodic payment – Interest accrued

Step 7: Finally, the closing balance is computed by deducting the principal repayment from the opening balance, which is,

Closing balance = Opening balance – Principal repayment

The below tabular representation is an illustration of an amortization schedule in excel (for a mortgage)

Amortization Schedule Example in Excel (Mortgage)

Let us assume that there is a company that has $1,000,000 of loan outstanding, which has to be repaid over the next 30 years. The equated annual repayment will be made annually at an interest rate of 12%.

Therefore, as per the question,

• Outstanding loan = $1,000,000
• Rate of interest = 12%
• No. of period = 30 (since payments are annual)

Using the above information, we have calculated the Periodic Mortgage Payment for the Amortization Schedule excel table.

So the Periodic Payment will be–

Then we have calculated the interest paid using the formula mentioned above.

So the Interest Paid will be –

So the table below is the mortgage amortization schedule in excel based on the above information,

Therefore, from the above table, it can be seen that the total interest paid is $2,724,309.73 on a loan of $1,000,000, i.e., the interest paid is approximately 2.7 times the actual loan. Also, from the table, it can be seen that the interest paid is more than the principal payment till the 24th year, which indicates the fact that interest payments are higher than the principal payment initially.

You can download this Mortgage Amortization Schedule Excel Template here – Amortization Schedule Excel Template

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