Mortgage Amortization: A Complete Guide To Your Payment Schedule

When you first get a home or refinance your loan, you may think about how long it will take to pay off your home and how the payments will be applied. To get a real answer to these questions, it helps to understand the concept of mortgage amortization. It may seem like intimidating mortgage jargon, but it’s really not all that complicated.

What Is Mortgage Amortization?

Mortgage amortization refers to the process of making regular monthly payments in order to pay off your mortgage loan.

Beyond showing you the amount of your monthly payments and the term of your loan, the mortgage amortization schedule shows what portion of that payment goes toward paying down the loan balance each month and the amount that goes toward interest.

Keep in mind that, while property taxes and homeowners insurance payments are part of your monthly mortgage payment (if you have an escrow account), they do not play a role in paying down your loan balance and, thus, have nothing to do with mortgage amortization.

How Mortgage Loan Amortization Works

When you start paying on a mortgage loan, everything proceeds on a specific schedule so that you pay the full loan balance plus the interest you owe up until you make your last scheduled mortgage payment.

With a fixed-rate mortgage, your mortgage payment is calculated based on your interest rate and loan term. Your monthly payment may change as a result of adjustments in property taxes or insurance costs, but it won’t impact the amount that goes toward principal and interest.

If you have an adjustable-rate mortgage, the concept is the same in that you’ll have made your last payment by the end of the term. However, each time your interest rate changes, your loan is re-amortized over the remainder of the term in order to reflect the interest rate changes.

Principal

When lenders speak of your principal, they’re referring to your loan balance. For example, if you buy a $300,000 home with a 10% down payment, your principal is $270,000. This amount further decreases with each mortgage payment you make. Initially, more of your payment goes toward paying off interest. In later years of the loan, you’re paying off principal faster.

Interest

Interest is what the lender (or more commonly an investor in the mortgage) receives in return for giving you the loan over the repayment term. The longer your term is, the higher your interest rate will be if everything else is held equal. If you have a 30-year mortgage, investors have to try to project the rate of inflation for a longer time than if you had a 15-year loan.

At the beginning of your term, you’ll pay more toward interest than the principal when you make your loan payment. Each month, a little more is paid toward the balance and it eventually flips so that by the end, nearly all of your payment is going toward the principal.

Repayment Term

The repayment term is how long you have to pay off your loan. You can pay off earlier, but if you just made every payment as scheduled, you’ll pay off after the number of years your term specifies.

Term makes a difference in a couple of ways. For the sake of simplicity, let’s just say we are comparing 30-year and 15-year terms. With a 30-year term, your monthly payment is lower, and it takes longer to pay off. With a 15-year term, it’s a bigger monthly payment, but a shorter pay off time.

However, the other important thing to know is that when you have a shorter term, you end up paying less interest. This is because a shorter-term means that more is put toward principal every month then it would be if you had a longer loan. This is true regardless of what the interest rate is.

What Is A Mortgage Amortization Schedule?

With a fixed-rate mortgage, the principal and interest portion of your payment will remain the same total amount every month. However, the makeup of that payment will change throughout the loan term.

When you first start paying off the loan, most of your payment will go toward paying interest. As you slowly start to pay off your principal, the amount of interest you’ll need to pay will decrease, so a larger share of your payment will be applied toward principal. This increases the speed with which you build equity.

Put simply: The more principal you owe, the more you’ll owe in interest. If you’re paying off a loan with a set monthly payment and a fixed interest rate, the amount of money you pay in interest will lower each month as your principal is lowered.

Mortgage Amortization Schedule Example

Mortgage lenders use amortization tables to map out the schedule of loan repayment. These tables show the change of principal/interest as the loan is repaid. Here’s an example of one of these tables for a 30-year fixed rate mortgage of $200,000 at 6.5% interest:

As you can see, the percentage of interest paid at the beginning of the loan is significantly more than at the end of the loan. As the loan amortizes over the years, the rate at which you’ll fully own your home will increase.

How To Calculate Mortgage Amortization

To figure out your mortgage amortization and calculate your mortgage payment, you need to know a few key pieces of information. Those include your:

Here’s the formula for calculating your mortgage payment.

In the formula above, we have the following variables:

M: mortgage payment

P: principal (mortgage balance)

I: interest rate (converted to monthly)

n: number of months of payments in the term

Complete the following steps. We’ll use the numbers from the example above:

To get the percentage into decimal form, move the decimal point on your annual interest rate two spaces to the left. In this case, 6.5% becomes 0.065. After that, you should be able to divide the number by 12 to come up with your monthly interest rate (0.065/12 = 0.00541667)

Once you have that number, it’s a matter of plugging the loan amount and loan term into the formula, but this one isn’t the easiest to type into a calculator or even an Excel sheet, so let’s take this step-by-step.

The first thing you’re going to do is calculate one plus the rate in parentheses. It comes out to 1.005417. You’ll raise this to the power of the number of months in your term. If you have a 30-year mortgage, that’s 360 months, the number would be 6.992633.

Assuming you’ve done everything correctly, the payment should be $1,264.14 when rounded to the nearest cent. If you didn’t come to that number, there’s no shame. Excel has a payment formula you can use.

The key to creating the entire table this way is that each time you make a payment, your mortgage balance gets lower. The interest that you have to pay every month is recalculated on that new balance and over time, you’re paying less and less interest. With that, here are the steps for the rest of the table.

We also have a mortgage amortization schedule calculator if you want to save yourself any math whatsoever.

Mortgage Amortization FAQs

Now that you understand the basics, here are some frequently asked questions people have surrounding mortgage amortization.

Can I make extra payments on my loan?

You can always make extra payments on your loan and pay off your mortgage faster while also cutting the amount of interest you pay. The one caution here is to be sure that your lender doesn’t charge a prepayment penalty. If it does, be sure to find out how many years it’s in effect so that you don’t get punished for paying off your loan too early.

Do interest rates affect mortgage amortization?

Interest rates affect the amount of interest you can expect to pay on an annual basis. However, it doesn’t affect the timing of your amortization schedule. The schedule and when you can expect to pay more principal than interest is based entirely on your loan term.

Why is it important to understand amortization?

Amortization is important to understand because it shows how your payments affect your balance over time. In and of itself, that might not be very exciting, but most calculators allow you to put in periodic extra payments so that you can see how many months early you pay off and how much interest you save by making a concerted effort to pay down your balance.

The Bottom Line: Understanding Your Mortgage Amortization Schedule Is Important

Mortgage amortization is the process of paying down your mortgage over the course of your term. An amortization schedule shows how those payments are applied.

You could do all your own math, but it’s not necessary. The important thing to understand is how the payment gets applied to your balance. The more extra payments you make toward your principal, the faster the payoff with less interest.