As consumers, we take different types of loans at different stages in life and for different needs. Whether it is a mortgage loan for buying a home, an auto loan for buying a vehicle, or a personal loan, most loans have two aspects in common: They come with a fixed period to repay the loan, and they have a fixed rate of interest through the repayment period, unless it is a floating rate loan.
When you borrow a loan with a fixed interest rate and defined repayment term, you'll also receive a loan amortization schedule along with it. This schedule offers important information around the monthly payments you will have to make. It also lets you calculate the total interest amount that you will pay through the loan tenure and the speed at which the loan's principal will be repaid. By learning how to calculate a loan amortization schedule, you'll be able to easily evaluate whether closing the loan faster by making extra payments is a sensible decision. Generally, if the interest charged on the loan is low and the loan offers you other benefits like tax deductions, you can continue the loan for longer, up to its full tenure.
While borrowing a home loan, make sure to thoroughly understand the amortization schedule. You can make use of a home loan amortization calculator for working out the numbers. In most cases, an amortization chart for a home loan is provided by the lender. Let’s learn more about amortization schedule, its uses, calculations, etc.
Understanding Amortization Schedule of Home Loans
What is Amortization?
Amortization means paying off a loan in equal instalments over its tenure. A portion of each instalment comprises the loan principal, and another portion is the interest. With loan amortization, the amount contributing to the principal is small at the start and gradually increases to a larger amount each month. Meanwhile, the interest amount keeps declining each month for fixed-rate loans. An amortization schedule reflects the money you are paying towards principal and interest throughout the loan tenure.
What is the Amortization Schedule?
A home loan amortization schedule provides basic information about the loan and how you'll be repaying it. It generally includes a complete list of all the payments required to be made over the loan tenure. Each amount on the schedule can be broken down as per the proportion of that goes for interest and principal. You'll also get to know the remaining loan amount after making every monthly payment. This will help in understanding your total debt as it comes down throughout the repayment tenure.
A loan amortization schedule also comes with a summary of loan repayment, either mentioned at the bottom or in a separate section. The summary will reflect the total amount of interest payments made through the loan tenure, while also confirming whether the total of principal payments matches the total outstanding loan amount.
What’s included in the Amortization Schedule?
Following are the details you will find in an amortization schedule.
• Instalment Number – Each EMI payment is provided with a serial number along with payment details mentioned in corresponding rows.
• Due Date - The dates on which loan EMIs are due.
• Opening Principal - The principal amount at the beginning of every month on which interest is calculated.
• Instalment Amount – Refers to the EMI or monthly repayment amount. It can change as per interest rate fluctuations over the loan tenure.
• Principal Portion of Instalment - This is the EMI component that goes into repayment of the principal amount of a loan.
• Interest Component of Instalment - The EMI component that goes into repaying interest on the opening principal value. At the start, EMIs are mostly made up of higher interest and the cycle gets reversed over time.
• Closing Principal – Refers to the remaining principal amount after each month’s EMI payment. It is the same as the opening principal for the consecutive month.
• Interest Rate Per Annum - This is the annual interest rate which may vary depending on the lender. Home Loan Interest Rate can change the EMI that has to be paid every month.
How to calculate the amortization schedule?
It is easy to prepare an amortization schedule using the available loan information including loan tenure, the number of EMIs to be paid, interest rate and the monthly instalment value. Here is an example to better understand this.
Consider a loan amount of Rs. 5,00,000
Rate of interest - 8% p.a.
Tenure - 10 years
Monthly payment - Rs. 6,066.
For calculating the interest component in first EMI, you need to multiply the loan amount with the interest rate. Since the rate of interest is annual, it must be divided by 12 for calculating the monthly interest. Therefore, (5,00,000*.08/12) gives the interest for the first month i.e. Rs. 3,333. The principal component is calculated by reducing this interest from the monthly instalment i.e. (Rs. 6,066-3,333) which is Rs. 2,733.
Take out the amount of principal paid in the first instalment from the total loan amount for arriving at the remaining loan balance. To calculate the consecutive month’s interest and principal amount as part of the instalment, repeat the mentioned calculation by considering the remaining loan amount. Repeat the mentioned steps till you have an amortization schedule for the entire loan tenure.
Make Use of Amortization Calculators
There are several online amortization calculators which can help in calculating the monthly charge. All you have to do is, provide the loan amount, interest rate and the loan tenure. By using these calculators, the periodic repayments that have to be made for a home loan can easily be calculated.
Conclusion
Loan amortization involves payment of fixed amounts at regular intervals. An amortization schedule is important because it lists regular payments to be made on a loan. Since it comprises principal and interest, you can easily keep a track of the overall remaining principal amount to be repaid.
At the same time, you will also be able to understand the interest component and switch loan providers in case the interest you pay is higher. The amortization schedule also helps you decide if you should continue repaying the loan as per schedule, or repay it ahead. So, make sure to understand the amortization schedule to better understand your home loan.