Amortization Schedule is a tabular presentation of the periodic payment amount, principal amount, interest, and the unpaid principal balance for each payment period. The purpose is to show the application of monthly payment towards principal and interest during the life of the loan. The schedule is built in such a manner that the loan amount is fully paid off by the end of the loan term.
Loan originators may provide you with an amortization schedule as part of their sales process.
The Amortization Schedule below is calculated for a $10,000 loan with 6% interest rate for a 1 year term.
The amortization schedule contains the following columns for each period.
In case of adjustable rate mortgage (ARM) loan, a change in interest rate will change the amortization schedule and the monthly payment for all remaining periods. The amortization schedule that the loan originator gives you at the time of loan origination is based on the initial interest rate only. As a borrower, you should realize that if the rate goes up the payments may go up significantly and the amortization schedule will look quite different. In these cases you may want to ask the loan originator to provide you with an amortization schedule that is based on a higher interest rate, a rate that you believe is likely to be prevalent in the future. In fact, go further and ask for a schedule based on the highest rate allowed under the loan (rate cap) and see how the schedule looks for you.
Be aware of loans that have an introductory or initial rate. Some lenders create ingenious loan products where the initial interest rate is quite low and have low monthly payments. Once the initial rate expires, which is usually in a short period of time, the rate and monthly payments increases dramatically and makes the amortization schedule look quite unappealing. Ask the loan originator for the amortization schedule based on the rate that will be applicable when the introductory interest rate expires. This will give you a true picture of the loan that you are getting into.
Updated: Aug 06, 2013