By: Elliot Austin

Within the world of finance is a world of borrowing because using other people’s money is how regular people get started in big business.

Borrowing is also how people who don’t happen to have $400,000 at their disposal purchase nice new homes in nice neighborhoods. Without mortgages, very few people would own homes and the middle class wouldn’t exist, as there would be two classes of people, the homeowners and those who rented from them.

The most important part of borrowing is knowing how much money you are paying back to the lender and how much money you are wasting on interest. Central to this knowledge is the understanding of what an amortization table is and how to use it.

What will the table tell us?

In short, amortization tables break monthly payments into two parts, the principal paid and the interest paid. So, it would behoove us if we knew what the total monthly payment was to begin with.

I know, it probably sounds like a cop out because we could calculate the payment, but that part of the equation will be left for another article.

In this example, the numbers may sound peculiar but we are going to use numbers that will make the example easy to follow. So, let’s say we have a mortgage with a principle of $360,000. The interest rate will be a 1970′s type 12%.

First we will take the amount of principal we have left to pay.

Then we have to multiply this amount by the number of months left to pay on the mortgage, in this case 360. If we didn’t do this, we would just be seeing the amount of interest that would be paid if there were only one month left to pay the mortgage.

on month’s payment=principal left/ number of months left x monthly interest x number of months left. Now, if you look at the formula you will see the term “number of months left” twice. Once it is a numerator (above the line) and once it is a denominator (below the line). Pretty easy, huh!

Begin calculating

$360,000 x .01= $3,600.

Next, we take the monthly payment we got from a mortgage calculator, which is $3,703.01, and we know the interest on the first payment is $3,600 so we will subtract it from $3,703.01, which will tell us the principal part of the first payment is $103.01. This is the first entry in our amortization table.

At this point, we know we no longer owe $360,000 on the mortgage because we have paid $103.01, so the principal left is now $360,000 – $103.01, or $359,896.99. We now multiply this number by .01 to get the interest part of the second payment. This is $3,598.97 and, since we know the total payment is $3,703.01, we will subtract $3,598.97 from it to get $104.04 which is the principal paid on the second payment.

There you have it. This, by the way, is something few people can say!

Even if you don’t continue on making these calculations, you now know, from a very inside perspective, exactly what amortization is all about!

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