What is a Home Loan Amortization Schedule and How to understand it?
A home loan is a helpful tool that can enable you to purchase a house that you like. The most significant advantage of home loans is their flexible and suitable repayment schedules that let you settle the loan at your preferred pace. When you apply for a home loan, you also get the option to choose the tenure, based on which your interest and repayments are calculated. This information is given to you in the form of a loan amortization schedule.
This article talks about loan amortization schedules and how to understand your schedule.
What is amortization, and what do you mean by the amortization schedule?
Amortization refers to settling a loan in installments over the chosen timeframe. Amortization includes not only the principal amount but also the home loan interest rates paid in each installment. While the principal amount increases with each installment, the interest decreases with time.
When your loan is sanctioned, an amortization schedule is handed over to you. This schedule contains information on your loan and the repayment routine that you have to follow to pay it back, along with a detailed description of each installment. Here are some components of the amortization schedule:
- Installment number: The total and the serial number of each installment.
- Due date: The due date of each month when you need to make the repayment.
- Opening principal: The outstanding amount at the beginning of every month.
- Closing principal: The outstanding amount at the end of the last month. This is the same as the opening balance of the following month.
- Installment: The amount to be paid each month. This is also referred to as the EMI (equated monthly installments).
- The principal component of installment: Percentage of the EMI spent on repaying the principal amount.
- The interest component of installment: Percentage of the EMI spent on paying home loan interest rates.
- Rate of interest charged: The interest rate charged every month on your loan amount.
How to calculate the amortization schedule?
Just like you calculate your loan amount manually or with a home loan EMI calculator, you can also calculate your amortization schedule.
You need the following information:
- Loan amount
- Rate of interest
- Loan tenure
- Calculating the principal component: Subtract the interest component from the monthly installment.
- Calculating the interest component: Take the loan amount and multiply it with interest. Divide this by 12 to get the monthly figure.
To sum it up
It is rather simple and quick to avail of a home loan with easy home loan eligibility criteria in today’s time. However, you must pay attention to your repayment capacity to ensure a timely settlement. Understanding the loan amortization schedule can help you ascertain whether you should continue with the bank’s schedule to pay back the loan or make a lump sum payment sooner. Moreover, it gives you detailed information on each installment that also helps you understand your annual tax liability.