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.
With every payment delivered by the borrower of an amortization loan, part of the interest along with a portion of the principal will be reduced. The principal, which is original amount of the loan, will gradually decrease with every loan payment. When the principal reaches 0 the loan is paid-off and the underlying asset becomes fully-owned.
The amortization loan is primarily based on the individual’s ability to meet the periodic payments (typically administered as a monthly payment).
Amortization Formula for Calculating the Payment Amount per Period
A=P r(1+2)^n/(1+r) ^n
A=Payment amount per period
P=The initial principal or the loan amount
R=The interest rate per period
N=The total number of payments or periods attached to the loan
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
R=rate per payment period
I=the nominal annual interest rate attached to the loan
N=the number of compounding periods per year
P=the number of payment periods per year
By using these amortization formulas you will effectively gather the rate per period (meaning the percentage payment of your loan) and the payment amount per period (meaning the actual dollar amount that you are forced to pay each period. Once this information has been obtained through the use of the amortization formula you will be able to create an amortization schedule which will list each pay period as it coordinates to the maturity of your loan.