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How Does Mortgage Amortization Work?

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Content was accurate at the time of publication.

Mortgage amortization is a financial term describing how you’ll pay off your loan completely — “mort” means “to kill” — by making payments over the long term. Understanding how your payments look over your loan’s lifetime can help you make decisions about your financial future.

What is mortgage amortization?

Amortization is essentially a blueprint for how you’ll pay off your mortgage in equal installments over a set time period. Lenders set up the schedule based on the total loan amount, called “principal,” and the interest rate they charge to lend you money. So, although your total monthly payment amount won’t change month to month, the portions of that payment going to interest and principal will. A mortgage amortization table shows the exact payment schedule and how much goes toward interest and principal in each payment.

With mortgage amortization:

  • You pay more toward interest than principal at the beginning of a mortgage.
  • You gradually reduce the principal amount with each mortgage payment until it’s paid off.
  • Your total monthly payment stays the same throughout the loan term, although the amount applied to principal and interest changes each month.
  • Fixed-rate mortgages are “fully amortizing,” which means that you’ll have paid the balance in full once you make all of your payments.

How a mortgage amortization schedule works

There are two calculations built into a mortgage amortization schedule:

  • Your principal balance. This is the amount you borrowed and is reduced after each payment, as you chip away at the total amount.
  • The amount of interest you owe. For a fixed-rate mortgage, this is based on the interest rate you locked in and covers the interest accrued during the previous month. Think of it like paying rent, except you pay at the end of the month instead of at the beginning.

The easiest way to calculate amortization is to use a mortgage amortization calculator that will create an amortization schedule for you. The schedule tracks:

  • The month and year of each payment
  • The amount of principal paid
  • The amount of interest paid
  • How much interest is paid as time goes on
  • How the loan balance adjusts with each monthly payment

Below is an example of a mortgage amortization schedule for a $400,000 30-year mortgage with a 5% fixed interest rate. You can also change the numbers by using the sliders if you’d like to create an amortization schedule based on your situation.

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You’ll notice as you make payments and progress through your loan term, a few things happen:

  • You’ll pay less interest each month.
  • You’ll pay more principal each month.
  • Your loan balance decreases with each payment.
  • Your monthly payment amount is always the same.

How to calculate mortgage interest and mortgage amortization

Everything in a loan’s amortization schedule is based on the interest rate, loan amount and loan term. If you’re a math whiz or just interested in the mechanics of how amortization works, try calculating mortgage interest and amortization yourself.

Calculating mortgage interest

To calculate mortgage interest, let’s use the example above of a 30-year $400,000 loan with a 5% fixed rate:

  1. To calculate the monthly interest percentage, divide your interest rate by 12 (.05/12), which equals ​​0.004167.
  2. Multiply that result by the $400,000 loan balance ($400,000 x 0.004167), which equals $1,666.67.

If you cross-reference $1,666.67 against the chart above, you can see your calculation is correct: The first mortgage payment of $2,147.29 includes $1,666.67 applied toward interest and $480.62 applied toward principal.

You can use this same calculation to find out how much you will pay or have paid in mortgage interest over the year. This can come in handy because of a tax benefit known as the home mortgage interest deduction, which allows homeowners to deduct the amount they’ve paid in mortgage interest over the year from their taxable income.

Calculating mortgage amortization

To understand how an entire mortgage amortization schedule is calculated, here’s a mortgage amortization formula to study:

The good news is that you don’t have to calculate your own mortgage amortization by hand unless you’d like to!

How to use a mortgage amortization schedule

You can accomplish many different things using a mortgage amortization schedule, such as:

Paying off your mortgage early Making one extra payment a year shaves nearly four years off your loan term on a 30-year mortgage, saving you thousands of dollars in interest. To see the impact, use an extra payment mortgage calculator to try different amounts until you find the sweet spot for paying off your mortgage early based on your budget and savings goals.

Tracking when PMI drops off Private mortgage insurance (PMI) protects lenders if you default on a loan with less than a 20% down payment. However, it drops off automatically after you’ve paid your balance down to 78% of the original value of the home, and you can request cancellation even earlier.

Determining if a shorter loan term makes sense Using amortization schedules to compare 30- and 15-year fixed-rate mortgages can help you see how much you could save in interest charges — provided you can afford a higher monthly payment.

Calculating when an ARM will reset Adjustable-rate mortgages (ARMs) give you temporary savings for a set time because these loans often have lower initial interest rates than fixed-rate loans. However, once the fixed-rate period ends, an amortization schedule can show you how much your payment might spike. This is especially true if interest rates increase. You can also find this information in the “projected payments” section on page 1 of your loan estimate.

Deciding whether to refinance When you refinance, you get a totally new loan, which puts you back at the beginning of the amortization process. Since equity is built far more gradually at the beginning of a loan term, it’s worth considering whether slowing the rate at which you build equity is in line with your financial goals. If you’re planning on moving, a mortgage refinance calculator can help you determine whether a refinance makes sense based on when you’ll “break even” (recoup your refinance closing costs).

Deciding whether to recast your mortgage A mortgage recast is a way of reducing your monthly payments without refinancing. Instead, you make a lump sum payment, and your payments are recalculated. An amortization schedule can show you how much you stand to save.

Estimating your future home equity It’s pretty simple to calculate how much equity you have now, but what if you want to know exactly how much you may have in the future? An amortization schedule makes this far simpler to figure out by providing you with the projected loan balance over time.

Negative amortization and interest-only loans

Not all loans are amortizing loans. Here’s a look at two loan types that won’t have a standard mortgage amortization schedule.

Interest-only loans

If you take out a home equity line of credit (HELOC), you can choose an interest-only payment option during the initial draw period (usually 10 years). The payment is lower because you make payments based just on the interest portion and not the principal loan balance.

Once the draw period expires, however, you’ll pay the remaining loan balance based on an installment plan outlined on the mortgage amortization schedule. Since many HELOCs are variable-rate, your payment amounts can change from month to month.

Reverse mortgages

If you’re 62 or older, you may be eligible for a reverse mortgage. Unlike a regular mortgage, a reverse mortgage is a negative amortizing loan, which means the loan balance grows instead of shrinking each month, because the lender makes payments to you instead of you making payments to the lender.

One of the benefits of a reverse loan is tapping your equity without having a monthly principal and interest payment for as long as you live in the home. That said, you’ll still have to pay homeowners insurance premiums and property taxes and maintain the home.

You’ll prepay a small amount of interest (the exact amount will be listed in your closing disclosure) and then commence making regular payments. Your first payment is typically due on the first day of the second month after you close.

If your lender allows you to make extra payments on your mortgage, you can specify that those funds go toward the principal balance. In that case, they’ll reduce the amount of interest you have to pay each month by shrinking the principal balance.

However, you’ll continue to make the same payment each month going forward; instead of lowering your future payment amounts, your extra payments speed up how fast you’ll pay off your loan. If you want to recalculate your amortization schedule and reduce your payments going forward, you’d need to seek a mortgage recast or refinance rather than simply making extra payments.

Unlike traditional mortgages, which are fully amortizing loans, balloon mortgages are only partially amortizing. What this means is the final amortized payment on a balloon loan doesn’t pay off the loan in full. Instead, there is remaining debt that needs to be paid off — this is the “balloon” payment, and it’s at least two times larger than the regular payments were.

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