Last updated October 9, 2024
What is an Amortization Schedule?
An Amortization Schedule is a table that shows the payment breakdown of a loan.
It doesn’t just show how long it takes to pay back a loan. Rather, it shows each payment amount, plus the portion going to interest, the portion going to the principal, and the remaining balance after each installment.
Generally, an Amortization Schedule is used in larger lending situations, such as loans for mortgages, business operations, or large asset purchases (e.g., cars and other vehicles). However, our template is customizable and perfect for any professional or personal lending situation, no matter the amount.
An Amortization Schedule is also known as a:
- Amortized payment schedule
- Amortization calculator
- Loan payment schedule
How does amortization work?
Amortization is the repayment of a loan or debt through regular payments or a lump sum over a predetermined period. With amortized loans, borrowers usually agree to repay the loan with interest over time. This process is reflected in an Amortization Schedule.
Each payment consists of two components:
- Principal is the original amount you borrowed. Each payment you make includes a portion that goes towards paying down this principal amount.
- Interest is the cost of borrowing the money. It's calculated based on the remaining principal balance of the loan and the interest rate specified in your Loan Agreement, Promissory Note, or mortgage.
Initially, the borrower pays more in interest because it's calculated based on the remaining principal balance. But, as time goes on and they chip away at the principal amount, they pay less in interest and more towards the principal. This concept is best represented in the following graph:
Example of amortization
Imagine you’re buying a house and taking a mortgage. Suppose you buy the house for $312,500 and you put a $62,500 down payment towards the purchase (i.e., 20%). In this case, your mortgage amount would be $250,000. You sign your mortgage with the following terms:
| Loan amount |
$250,000 |
| Monthly payments |
$1,755.76 |
| Term length |
25 years |
| Interest rate |
7.25% compounded yearly |
For the first payment of $1755.56, $1,505.42 goes toward interest while $250.34 goes to the principal. With each payment, the amount of interest lessens.
At the end of the loan term, the final payment will go almost completely towards the principal, if not entirely.
Of course, if you re-sign your mortgage and the interest rate changes, this will impact your Amortization Schedule.
What does an Amortization Schedule include?
Use LawDepot’s template to generate a custom table that details:
- Payment due dates and amounts
- Principal payments (i.e., the amount paid toward debt, minus interest)
- Interest charged per payment, plus total interest charged over time
- The remaining balance after each payment
How to create an Amortization Schedule
Answer LawDepot’s user-friendly questionnaire to generate your custom document. After specifying whether you are the borrower or lender, the information you’ll need to complete your Amortization Schedule includes:
1. Payment details
Choose one of the following options for payment:
- A lump sum at the end of the term, including the principal plus accumulated interest
- Fixed regular payments made periodically during the term, with any outstanding balance paid at the end of the term
- Fixed regular payments to principal and interest so no balance remains at the end of the term
- Fixed regular payments to interest only and the borrower repays the principal at the end of the term
2. Term length
State when the money will be loaned and when it must be repaid.
The term length is completely dependent on your unique situation. If it’s a smaller loan amount, a lender may want it paid back in one or two years. If it’s a larger amount, such as a mortgage, a lender may allow a 10-year, 15-year, 20-year, or 30-year term length.
3. Note amount
State the amount of money being lent, the interest rate, and whether interest is compounded every month, six months, or year.
4. Payment plan
Specify how often payments must be made and the day each payment is due (e.g., payments will begin on January 1, 2025, and continue on the 15th of each following month).
With our template, payments can be made weekly, monthly, or yearly.
Benefits of using an Amortization Schedule
An Amortization Schedule provides several benefits to borrowers and lenders alike:
- Clarity and awareness: Understanding how much of each payment goes towards interest and principal helps borrowers understand how they’re reducing their debt over time. This awareness encourages borrowers to evaluate the long-term cost of borrowing.
- Equity building: For loans secured by assets like homes, the schedule shows how equity in the asset grows over time as the principal balance decreases. This can be particularly important for homeowners who may want to leverage their equity for future financial goals.
- Early repayment strategies: By reviewing the schedule, borrowers can see the impact of additional payments towards principal and determine the potential savings in interest by paying off the loan ahead of schedule (assuming the Loan Agreement or Mortgage Agreement allows early repayment).
