The Mortgage Amortization Schedule

Amadeus
July 14, 2014
1 Monthly payment
P = loan amount (principal)
n = number of periods
r = interest rate per period
We make payments each period in the amount of x dollars. Each period part of x goes toward interest and the
rest goes toward the principal, thus reducing the principal. The next payment period interest is applied to the
reduced principal. Mathematically,
period initial balance payment end balance
t = 0 P
0
= P
x = rP
0
+ y
1
P
1
= P
0
y
1
t = 1 P
1
= P
0
(1 + r) x
x = rP
1
+ y
2
P
2
= P
1
y
2
. . . . . . . . . . . .
t = k 1 P
k1
= P
k2
(1 + r) x
x = rP
k1
+ y
k
P
k
= P
k1
y
k
t = k P
k
= P
k1
(1 + r) x
x = rP
k
+ y
k+1
P
k+1
= P
k
y
k+1
. . . . . . . . . . . .
t = n + 1 P
n+1
= P
n
(1 + r) x = 0
Table 1: Monthly payments and remaining balance.
P
k
= P
k1
(1 + r) x 1
P
k1
= P
k2
(1 + r) x (1 + r)
.
.
.
.
.
.
P
2
= P
1
(1 + r) x (1 + r)
k2
P
1
= P
0
(1 + r) x (1 + r)
k1
so adding side by side
P
k
= P
0
(1 + r)
k
x
(1 + r)
k
1
r
k = 0, . . . n + 1 (1)
1
Proposition 1.1 To pay o a principal P in precisely n periods at r percent interest per period we have to pay
x =
rP
0
(1 + r)
n+1
(1 + r)
n+1
1
(2)
per period.
Proof: : Set P
n+1
= 0 in (1) and solve for x.

Example 1.1
P = $285, 000
n = 360 months
r = 0.035/12 (3.5% per month)
The amount per period is then
x = $1277.77
and the total amount paid is
n x = $459998.02

2 Extra principal
We can shorten the duration of the loan if we pay some xed amount y each period, towards the principal only,
in addition to the amount x given by (2). This is what happens now:
period initial balance payment end balance
t = 0 P

0
= P
x

= rP

0
+ y
1
+ y P

1
= P

0
y
1
y
t = 1 P

1
= P

0
(1 + r) x

= rP

1
+ y
2
+ y P

2
= P

1
y
2
y
. . . . . . . . . . . .
t = k P

k
= P

k1
(1 + r) x

= rP

k
+ y
k+1
+ y P

k+1
= P

k
y
k+1
y
Table 2: Monthly payments and remaining balance with extra principal.
Since the recurrence for P

k
is the same as the one for P
k
with x replaced by x

(table (1)), the equation for P

k+1
can be obtained from that of P
k
(equation (1)):
P

k
= P

0
(1 + r)
k
(x + y)

x

(1 + r)
k
1
r
with x given by (2) (3)
Now we want to see how many periods would be necessary if we pay the extra y dollars per period towards
the principal. To this end we set P

k+1
= 0 and solve for k:
2
rP
0
(1 + r)
k+1
= (x + y)

(1 + r)
k+1
1

(x + y rP
0
)(1 + r)
k+1
= x + y
k =
log (x + y) log (x + y rP
0
)
log (1 + r)
1
Example 2.1 Continuation of example (1.1). Suppose we pay an extra y = $100 towards the principal. Then
k = 316.48 months
x

= x + y
= $1377.77
k x

= $436043.30
We would be saving
nx kx

= $23954.72
With y = $200 we would be paying o in k = 282.84 months (23.57 years) and would be saving $42013.92.

A Matlab code
function x=paymentPerPeriod(P,n,r)
x = r.*P.*(1+r).^(n+1) ./ ((1+r).^(n+1) - 1 );
function [k,x]=extraPrincipal(P,n,r,y)
x=paymentPerPeriod(P,n,r);
k=(log(x+y)-log(x+y-r*P))/log(1+r)-1;
3