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Building an Amortization Schedule How the banks do it and what we need to know…

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Presentation on theme: "Building an Amortization Schedule How the banks do it and what we need to know…"— Presentation transcript:

1 Building an Amortization Schedule How the banks do it and what we need to know…

2 What is an Amortization Schedule? Answer: An Amortization Schedule is a payment schedule calculated from our monthly payments that shows: Interest accrued for that payment Principle deducted for that payment Principle remaining. Amortization Schedules allow to examine a loan in depth and determine whether we can afford such a liability.

3 How do I build an Amortization Schedule? 1 st – Gather all of the details about our loan. Ex) I borrow $300 at 10% interest compounded quarterly for 1 year. What I know: P = 300 r =.10 n = 4 (quarterly) t = 1 2 nd – I calculate my monthly payment

4 Now for the Schedule: 3 rd - Create a table to help calculate/organize my values: Payment #Monthly payment Interest paid this term Amt. paid on the principle Balance Unpaid 1 Calculated In step 2 $ Unpaid Balance from row 1 used here Unpaid Balance from row 1 used here 3$79.75Unpaid Balance from row 2 used here 4$79.75

5 Let’s examine Row 1 Row 1 Payment #Monthly payment Interest Paid this term Amount paid on balance Balance Unpaid 1$79.75 Calculated In step 2 as $

6 Now, Let’s Examine Row 2 Row 2 Payment #Monthly payment Interest Paid this term Amount paid on balance Balance Unpaid 1$ * = $7.50 $ $7.50 = $ $300 - $72.25 = $ $79.75 Calculated In step 2 as $ Note the unpaid balance for Row 2 is from Row 1!!

7 Continuing in this manner creates the following table: Payment #Monthly payment Interest paid this term Amt. paid on the principle Balance Unpaid 1 $ * = $7.50 $ $7.50 = $ $300 - $72.25 = $ $ * = $5.69 $ $5.69 = $ $ $74.06 = $ $ * = $3.84 $ $ 3.84 = $ $ $75.91 = $ $ * = $1.94 $ $1.94 = $ $ $77.78 = $0 Note the difference in the last payment. This is due to rounding throughout the schedule. Last Payment = Balance Unpaid + (Interest paid this term)


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