What is the Amortization Formula?
In the most simplistic sense, an amortization is a type of loan (typically offered as a mortgage or a long-term loan) where the borrower (an individual or business entity) will reduce the value of an asset or the balance of the loan through fixed-periodic payments. The payments delivered by the borrower are used to diminish the interest attached to the loan as well as the principal balance of the loan. In a typical amortization loan, the majority of the earliest payments will be used to offset the interest, while the later payments are used to pay-off the remaining principal balance.
Amortization Formula for Calculating the Payment Amount per Period
The above formula will give the borrower the exact amount that he or she will pay during each monthly installment. The rate of their loan, or the rate per period, is calculated using the following formula:
Amortization Formula for Calculating the Rate per Period