What is amortization?
Amortization is a way of paying off a debt by spreading payments over a period of time. Payments are divided into equal amounts for the duration of the loan, making it the simplest repayment model.
You are likely to have it when dealing with:
- Mortgage payments
- Car loans
How is it calculated?
- A = periodic amortization payment
- P = principal amount borrowed
- r = periodic interest rate divided by 1,200
- n = total number of payments
For example, if you borrowed $100,000 at an interest rate of 10% and you wanted to make 60 total payments, your periodic amortization payment would be . . .
You would make a payment of $2,125 every month for five years to pay off your loan.
What is an amortization schedule?
It is a table that shows how much each payment will be and over how long a period to pay back the loan. It is usually a blend of payments for the actual loan amount and the interest owed.
|-||Beginning Balance||Interest||Principal||Ending Balance|
Beginning balance: how much you have left to pay at the beginning of the year
Interest: how much you pay toward interest
Principal: how much you pay toward the principal amount
Ending Balance: how much you have left to pay at the end of the year
An amortization payment consists of a payment applied to both the interest and principal balance of a loan.
Calculator: How much will you have at retirement?
Initially, a large portion of each payment is devoted to interest. Over time, larger portions go toward paying down the principal.
This is the schedule for the previous example of a principal amount of $100,000 at an interest rate of 10% over five years.
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Amortization vs. Depreciation
Amortization: used with intangible assets, such as goodwill, copyrights, and patents
Depreciation: used when dealing with tangible assets, such as buildings, machinery, and equipment
- The word “amortization” comes from Middle English “amortisen,” meaning to kill or alienate and from the Latin words “ad” and “mort,” meaning death.
- There is such a thing as Negative amortization when you don’t pay interest on the loan, so the amount you owe actually goes up instead of down.
- The most popular period of amortization in Canada is 25 years. About three-quarters of Canadians who have a mortgage have selected a 25-year amortization.
- http:// www.discoveryfinance.com/useful-facts-about-home-mortgage.html
- http:// www.mortgagerates.ca/mortgage-help/mortgage-term-vs-amortization