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

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

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.

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

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 \$79.75 - - 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

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 \$79.75 --

Now, Let’s Examine Row 2 Row 2 Payment #Monthly payment Interest Paid this term Amount paid on balance Balance Unpaid 1\$79.75300 * 0.025 = \$7.50 \$79.75 - \$7.50 = \$ 72.25 \$300 - \$72.25 = \$ 227.75 2\$79.75 Calculated In step 2 as \$79.75 -- Note the unpaid balance for Row 2 is from Row 1!!

Continuing in this manner creates the following table: Payment #Monthly payment Interest paid this term Amt. paid on the principle Balance Unpaid 1 \$79.75 300 * 0.025 = \$7.50 \$79.75 - \$7.50 = \$ 72.25 \$300 - \$72.25 = \$ 227.75 2\$79.75227.75 * 0.025 = \$5.69 \$79.75 - \$5.69 = \$ 74.06 \$227.75 - \$74.06 = \$ 153.69 3\$79.75153.69 * 0.025 = \$3.84 \$79.75 - \$ 3.84 = \$ 75.91 \$153.69 - \$75.91 = \$ 77.78 4\$79.7277.78 * 0.025 = \$1.94 \$79.72 - \$1.94 = \$ 77.78 \$77.78 - \$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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