Question

What is a loan amortization schedule?  How would you use it to determine your loan interest rate? In which months is most of the interest paid?  Why? What is the percentage difference of interest paid with a 30-yr. loan vs. a 15-yr. loan as a percentage of the 15-yr. loan interest amount?  What factors would affect your choice between two loans?  Would making payments two weeks early each month make much difference in the total amount paid?

Answer 1

The loan amortization schedule shows us how the interest and the principal are paid off during the term of the loan. The interest rate can be determined by adding the entire interest column and then compared it against the principal.

The interest is paid of most during the initial few months and the composition of interest in the monthly payments reduces as the term increases. Hence you pay most of the interest in the initial months and most of the principal in the furthest months.

We pay lower interest in the 15 year loan than a 30 year loan because the interest compounded for a shorter period than a 30 -year loan. We cannot calculate the exact difference in percentage since we do not know for how much is the loan.

The factors that would affect the choice are:

1. The monthly or annual salary or cash inflow to an individual or a business - 15 years loans require higher monthly or annual payment than 30 year loans

2. Are there any bonus points available for a 15 or a 30 year loan

3. Are there any interest rate difference between the two loans?

No. Making payments two weeks early will not serve any purpose and there may be some pre-payment penalty in some loans. It make sense to pay off the lump sum may be at the end of the 5th year if you plan to resell the property or home.