| Within the world of finance is a world of borrowing | | | | month. |
| because using other people's money is how regular | | | | Next, we want to multiply this amount by one month's |
| people get started in big business. | | | | interest. One month's interest will be found by dividing |
| Borrowing is also how people who don't happen to | | | | the yearly interest rate by 12. Then we have to multiply |
| have $400,000 at their disposal purchase nice new | | | | this amount by the number of months left to pay on |
| homes in nice neighborhoods. Without mortgages, very | | | | the mortgage, in this case 360. If we didn't do this, we |
| few people would own homes and the middle class | | | | would just be seeing the amount of interest that would |
| wouldn't exist, as there would be two classes of | | | | be paid if there were only one month left to pay the |
| people, the homeowners and those who rented from | | | | mortgage. |
| them. | | | | Simplify the formula |
| The most important part of borrowing is knowing how | | | | Here's how that formula looks: Int. on month's |
| much money you are paying back to the lender and | | | | payment=principal left/ number of months left x |
| how much money you are wasting on interest. Central | | | | monthly interest x number of months left. Now, if you |
| to this knowledge is the understanding of what an | | | | look at the formula you will see the term "number of |
| amortization table is and how to use it. | | | | months left" twice. Once it is a numerator (above the |
| In this article not only will we discuss these two things, | | | | line) and once it is a denominator (below the line). This |
| but also you will actually be taught how to build an | | | | means we can divide it by itself. So, the formula now |
| amortization table and we will calculate one as we go | | | | looks like: Int. on month's payment=principal left x |
| along. | | | | monthly interest. Pretty easy, huh! |
| What will the table tell us? | | | | Begin calculating |
| The first step to calculating an amortization table is the | | | | Now, let's build our amortization table. $360,000 x .01= |
| understanding of what the table will tell us. In short, | | | | $3,600. This is the interest paid the first month. Not |
| amortization tables break monthly payments into two | | | | sure where the .01 came from? It is 12%, or .12, which |
| parts, the principal paid and the interest paid. So, it | | | | is the yearly interest rate divided by 12 giving us the |
| would behoove us if we knew what the total monthly | | | | monthly interest rate. |
| payment was to begin with. | | | | Next, we take the monthly payment we got from a |
| I know, it probably sounds like a cop out because we | | | | mortgage calculator, which is $3,703.01, and we know |
| could calculate the payment, but that part of the | | | | the interest on the first payment is $3,600 so we will |
| equation will be left for another article. Here, we're | | | | subtract it from $3,703.01, which will tell us the principal |
| going to go to a financial or mortgage calculator and | | | | part of the first payment is $103.01. This is the first |
| find out the payment. Then, we will do the calculations | | | | entry in our amortization table. $3,6000 interest and |
| to break the payment down into its two parts. | | | | $103.01 principal. |
| Let's start by using an example. In this example, the | | | | At this point, we know we no longer owe $360,000 on |
| numbers may sound peculiar but we are going to use | | | | the mortgage because we have paid $103.01, so the |
| numbers that will make the example easy to follow. | | | | principal left is now $360,000 - $103.01, or $359,896.99. |
| So, let's say we have a mortgage with a principle of | | | | We now multiply this number by .01 to get the interest |
| $360,000. The mortgage will be paid off over 30 | | | | part of the second payment. This is $3,598.97 and, |
| years, or 360 monthly payments. The interest rate will | | | | since we know the total payment is $3,703.01, we will |
| be a 1970's type 12%. | | | | subtract $3,598.97 from it to get $104.04 which is the |
| Interest calculation formula | | | | principal paid on the second payment. |
| Now, we will see how much interest we will pay on | | | | There you have it. You just continue calculating in this |
| the first payment. First we will take the amount of | | | | way for another 358 payments and you will have built |
| principal we have left to pay. In this case it will be the | | | | your amortization table completely by hand. This, by |
| whole mortgage of $360,000. We need to divide it by | | | | the way, is something few people can say! |
| the number of months we have left to pay because | | | | Even if you don't continue on making these calculations, |
| we are building a monthly amortization table. This will | | | | you now know, from a very inside perspective, exactly |
| tell us the amount we are paying interest on for one | | | | what amortization is all about! |