Definition: An amortization schedule helps determine how much money needs to be paid off each month on an existing mortgage balance. This helps ensure that you pay off your maximum potential debt each month and still have enough left over to carry out any other needed expenses at the end of the month. Typically, the amount paid off each month is equal to the remaining balance on the loan plus any new payments made on time.
The payment schedule should be written in advance and calculated so that each installment will be made on time with interest and late fees included. When calculating the payments for your loan, you should write down each month during which you are due a certain amount and the total of all payments due at that time. This will prevent you from overdrawing your account and paying more interest than what it is possible to pay.
An amortization calculator is used to calculate the amortization schedule for a loan based on the inputs used to create the loan application. It returns information about the amount and length of the loan based on the schedules specified. Amortization repayment is then calculated as a percentage of the total loan amount.
Types of Amortization Schedule
- Straight Line method
The straight-line method is the oldest and is the most inexpensive. You pay off the balance as it comes due. This means the larger your balance then, the faster you pay off your debt. However, it is at your own risk that you may not have the cash to cover unexpected expenses if your income drops or you lose your job.
- Declining Balance Method
The declining balance method is also available, but it requires paying additional interest on the balance that accrues while you are away from your job. The declining balance method is used when your balance is low, and you may be able to make fairly small payments over time. It lets you keep your loan rates low and makes it easier to qualify for small business loans, home-based business loans, and other financial assistance.
- Annuity Method
An annuity method is to make payments to a fund by periodic payments made at regular intervals. This is the method of paying off your debt in equal installments over a set period. This usually results in payments being made regularly on scheduled dates each month, with each installment being equal to the full amount of your outstanding debt. There are two types of Annuity methods: ordinary annuity and annuity due
In an ordinary annuity method payments are made at the end of the period they are due. However, with an annuity due, the payments are made at the beginning of each period instead of at the end of each period.
- Bullet Loan
Using a bullet loan requires a time frame to repay the loan. As fast as you pay off the debt, the faster the interest will be deducted from your paycheck, and the faster your paycheck will be paid off. However, this means that if you delay paying off your debt, interest will continue to build, and you will do more damage to your credit score than if you would have paid off your debt immediately. Therefore, you must understand exactly how much money you can afford to lose before you make a financial commitment to any lender.
- Balloon loans
balloon loans are for current expenses, and unlike a traditional loan, you don’t pay off the entire principal in one go. You pay off the principal with interest each month until you have paid off the entire principal, which means you don’t have to pay more in interest until the loan is paid off. Once the principal has been paid, the bank removes the balloon from your account and sends you a payment for the remaining balance; this is typically what someone would refer to as a ‘negative amortization.’
- Negative amortization method
The negative amortization method is commonly used when payment will not be made on time or if payments have been made but not fully paid off. In these cases, the amortization schedule helps limit the increase in payments due to late payments.
Amortization schedules are a way of paying off debt over time. This means that the balance of your loan grows as your income levels rise, and so does the interest charged. As your income rises, so is the percentage you have to pay on your loan. This has the effect of making your loan payable more quickly than if you had paid it off in full when you were earning high incomes. For this reason, Amortization schedules are usually carried out using periodic payments, which increase the overall volume of payments over time but allow you to pay off your principal over a shorter period.