MODULE 2

Amortization Payment

LEARNING OBJECTIVES:
1) To define amortization payment
2) To compute amortization payment

I.DISCUSSION:

Amortization is the process of spreading out a loan into a series of fixed payments. The loan is
paid off at the end of the payment schedule.

Amortization refers to how loan payments are applied to certain types of loans. Typically, the
monthly payment remains the same and it's divided between interest costs (what your lender gets
paid for the loan), reducing your loan balance (also known as paying off the loan principal), and
other expenses like property taxes.

Your last loan payment will pay off the final amount remaining on your debt. For example, after
exactly 30 years (or 360 monthly payments), you’ll pay off a 30-year mortgage. Amortization
tables help you understand how a loan works and they can help you predict your outstanding
balance or interest cost at any point in the future.

How Amortization Works

The best way to understand amortization is by reviewing an amortization table. If you have a
mortgage, the table was included with your loan documents.

An amortization table is a schedule that lists each monthly loan payment as well as how much of
each payment goes to interest and how much to the principal. Every amortization table contains
the same kind of information:

 Scheduled payments: Your required monthly payments are listed individually by month

for the length of the loan.
 Principal repayment: After you apply the interest charges, the remainder of your
payment goes toward paying off your debt.
 Interest expenses: Out of each scheduled payment, a portion goes toward interest, which
is calculated by multiplying your remaining loan balance by your monthly interest rate.