Amortization Table

Topic

Financial Literacy

Definition

An amortization table is a schedule of loan payments showing the amount of principal and the amount of interest that make up each payment until the loan is paid off at the end of its term.

Description

An amortization table is crucial for understanding how loans are repaid over time. Each row of the table breaks down the monthly payment into interest and principal components, showing how much of each payment goes toward reducing the loan balance. This is particularly important for large loans like mortgages, where the interest portion is significant in the early years. Understanding this breakdown helps borrowers see the long-term cost of the loan and the benefits of making extra payments to reduce the principal faster.

Amortization tables are used in various real-world applications, including mortgage loans, car loans, and personal loans. They help borrowers plan their finances by providing a clear picture of how much they owe and how their payments are applied. For example, in a 30-year fixed-rate mortgage, the table will show that in the early years, most of the payment goes toward interest, while in the later years, more goes toward the principal.

In math education, understanding amortization tables involves algebraic concepts such as compound interest and the geometric series. The formula for the monthly payment of a fixed-rate mortgage is 

where M is the monthly payment, P is the loan principal, r is the monthly interest rate, and n n is the number of payments. This formula helps students understand the relationship between the loan amount, interest rate, and payment schedule.

Teacher's Script: "Let's look at an amortization table for a $200,000 mortgage at a 4% annual interest rate over 30 years. The table shows that in the first month, $666.67 of the $954.83 payment goes toward interest, and $288.16 goes toward the principal. By the end of the loan, the principal portion increases, and the interest portion decreases."

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