How Can I Use Amortization Schedules' Straight-Line Method?

14 Oct

How Can I Use Amortization Schedules' Straight-Line Method?

Straight-line amortization is a technique of calculating fixed periodic payments for a mortgage loan and assigning changing amounts for interest and principal payment every interval. Several software packages or internet services can help you to build a straight-line amortization program, or you can develop one on your own using a spreadsheet application or pencil and paper.

Write interest rate and the main loan amount down. Locate this data in your original loan documentation. As an example, if you’ve got a $100,000 loan with a 5% interest rate, 100,000 is going to be the primary amount and 0.05 is going to be the interest amount.

Calculate the number of payment periods over the life of this loan. Multiply the entire number of decades on the loan by 12 to arrive at a monthly figure. By way of example, a 30-year mortgage will have 360 payment periods (30 x 12 = 360).

Divide the annual interest rate by 12 to calculate your monthly interest rate. In the example, if your annual interest rate is 5%, the periodic interest rate will be 0.041 percent.

Calculate the fixed monthly payment for every phase. Use this formula to find the straight-line monthly payment amount, assuming that P = the amount of the loan, R = the periodic interest rate and N = the entire number of payments during the life of the loan: Periodic payment amount = P [ R (1 + R ) ^ N) / (1 + R) ^ N — 1) ] Utilizing the example from the preceding steps, if you’ve got a 30-year, $100,000 mortgage at 5% interest with 360 payment periods, the formula would appear as follows: Periodic payment amount = 100,000 [ 0.00041 (1 + 0.00041) ^ 360) / (1 + 0.00041) ^ 360 — 1 ] Applying these figures, you would arrive at a total monthly payment of around $285.

Assign an amount to each payment interval for principal and interest payment. Multiply the interest rate by the preceding period’s loan balance to find the interest rate for each phase. Subtract the interest charge from the present period’s monthly payment to find the principal amount for each phase.

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