Loan Amortization Schedules: How Payments Are Calculated
Amortization tables show exactly how each loan payment splits between principal and interest. Understanding this breakdown helps you make smarter decisions about extra payments and refinancing.
Key Takeaways
- Amortization spreads a loan into equal periodic payments that gradually shift from interest-heavy to principal-heavy.
- `M = P * [r(1+r)^n] / [(1+r)^n - 1]`
- M = 300000 * [0.005417(1.005417)^360] / [(1.005417)^360 - 1]
- Notice how Month 1 is 86% interest, while the final payment is 99% principal.
- Adding $200/month to the above mortgage saves $89,000 in interest and pays off the loan 5 years early.
What Is Amortization
Amortization spreads a loan into equal periodic payments that gradually shift from interest-heavy to principal-heavy. In the first years, most of your payment covers interest. By the end, nearly all of it reduces the principal.
The Monthly Payment Formula
M = P * [r(1+r)^n] / [(1+r)^n - 1]
Where:
- M = Monthly payment
- P = Loan principal
- r = Monthly interest rate (annual / 12)
- n = Total number of payments
Example: $300,000 Mortgage at 6.5% for 30 years
- r = 0.065 / 12 = 0.005417
- n = 30 * 12 = 360
- M = 300000 * [0.005417(1.005417)^360] / [(1.005417)^360 - 1]
- M ≈ $1,896 per month
Total paid over 30 years: $682,633. Of that, $382,633 is interest — more than the original loan amount.
Amortization Schedule Sample
| Month | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $1,896 | $1,625 | $271 | $299,729 |
| 2 | $1,896 | $1,624 | $272 | $299,457 |
| 180 | $1,896 | $1,053 | $843 | $193,360 |
| 360 | $1,896 | $10 | $1,886 | $0 |
Notice how Month 1 is 86% interest, while the final payment is 99% principal.
Impact of Extra Payments
Adding $200/month to the above mortgage saves $89,000 in interest and pays off the loan 5 years early. Extra payments go entirely toward principal, reducing the base on which future interest is calculated.
Refinancing Decision
Refinancing makes financial sense when the interest savings over the remaining term exceed the closing costs. Calculate the break-even point: if closing costs are $4,000 and monthly savings are $200, break-even is 20 months.