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Mortgage Amortization Schedule: How It Works

Couple looking at a mortgage amortization schedule

Every time you make a monthly mortgage payment, you are building your housing wealth. Each payment also reduces your loan balance through a process called mortgage amortization. Understanding a mortgage amortization schedule can help you time when to refinance, or how you can pay off your home loan faster.

In this article, we’ll cover:

What is mortgage amortization?

Mortgage amortization is the process of paying off a mortgage loan balance in equal installments over a set time period. Interest is charged by a lender in exchange for borrowing money over an extended time period, and it’s based on the total loan amount, which is called “principal.” Each mortgage payment you make chips away at the principal amount until the balance reaches zero.

At the beginning of a mortgage, you pay more interest than principal. As the loan balance drops over time, more principal is paid than interest. Despite the changes to how much is applied to principal and interest each month, your total monthly payment stays the same for fixed-rate loans.

How a mortgage amortization schedule works

There are two calculations built into a mortgage amortization schedule. The first one measures how much interest is due on the loan balance based on the interest rate you locked in. The interest charge is recalculated every month as the balance drops, which is why you pay less interest over time.

The second calculation reflects how much of the principal balance is paid down each month, and is also recalculated with each monthly payment. As the loan balance shrinks, more of your monthly payment is applied to principal.

You can try using our home loan calculator to calculate your own mortgage amortization schedule, or you can learn more about the mechanics of how the schedule is formulated below. Here’s how to calculate mortgage amortization:

 

Mortgage amortization tables do the math for you with a few simple inputs. The graphic below shows how each dollar is spent in the first and 15th year of a 30-year mortgage amortization schedule for a $240,000 loan at a rate of 3.75%.

Year 1

2020 Principal: $4,413.07 Interest: $8,924.66 Taxes & Fees: $4,200.00 Total Payment: $17,537.73 Loan Balance: $235,586.93
January $361.48 $750.00 $350.00 $1,461.48 $239,586.93
February $362.61 $748.87 $350.00 $1,461.48 $239,275.92
March $363.74 $747.74 $350.00 $1,461.48 $238,912.18
April $364.88 $746.60 $350.00 $1,461.48 $238,547.30
May $366.02 $745.46 $350.00 $1,461.48 $238,181.28
June $367.16 $744.32 $350.00 $1,461.48 $237,814.12
July $368.31 $743.17 $350.00 $1,461.48 $237,445.81
August $369.46 $742.02 $350.00 $1,461.48 $237,076.35
September $370.61 $740.86 $350.00 $1,461.48 $236,705.74
October $371.77 $739.71 $350.00 $1,461.48 $236,333.97
November $372.93 $738.54 $350.00 $1,461.48 $235,961.03
December $374.10 $737.38 $350.00 $1,461.48 $235,586.93

 

Year 15

2034 Principal: $7,454.00 Interest: $5,883.73 Taxes & Fees: $4,200.00 Total Payment: $17,537.73 Loan Balance: $152,838.71
January $610.56 $500.91 $350.00 $1,461.48 $159,682.15
February $612.47 $499.01 $350.00 $1,461.48 $159,069.68
March $614.38 $497.09 $350.00 $1,461.48 $158,455.30
April $616.30 $495.17 $350.00 $1,461.48 $157,838.99
May $618.23 $493.25 $350.00 $1,461.48 $157,220.76
June $420.16 $491.31 $350.00 $1,461.48 $156,600.60
July $622.10 $489.38 $350.00 $1,461.48 $155,978.50
August $624.04 $487.43 $350.00 $1,461.48 $155,354.45
September $625.99 $485.48 $350.00 $1,461.48 $154,728.46
October $627.95 $483.53 $350.00 $1,461.48 $154,100.51
November $629.91 $481.56 $350.00 $1,461.48 $153,470.59
December $631.88 $479.60 $350.00 $1,461.48 $152,838.71

 

So what does all this mean? During the first year of your mortgage, you’re paying a lot more interest than principal. The bank makes the most money during the early years of a mortgage when your loan balance moves down slowly.

By the time you get to Year 15 (180th payment) on the mortgage amortization schedule, you’re paying more principal than interest and the balance of the loan starts to drop more rapidly. A lower loan balance compared to your home’s value translates into having more equity, which you can borrow against or pocket as cash when you sell your home.

4 ways to use a mortgage amortization chart

A mortgage amortization table is a powerful financial tool in the hands of a savvy user. There are four financial goals you can achieve using a mortgage amortization schedule or calculator.

  1. Pay your loan off faster. Even making one extra payment each year shave off eight years on your repayment, saving you thousands of dollars in interest. Use a mortgage calculator with a mortgage amortization schedule to see the impact of a lump sum or even an extra payment of $100 per month has on the lifetime interest charges.
  2. Calculate when PMI drops off. Buyers who can’t come up with a 20% down payment to buy a home typically pay private mortgage insurance (PMI). Lenders are required to cancel PMI automatically when your loan balance falls to 78% of the original value of your home — as long as you’re current on your mortgage payments. If you multiply the original home value by 0.78 and locate the closest payment result on the amortization table, you’ll pinpoint the month and year PMI drops off.
  3. Determine if a shorter term is worth it. Taking out a mortgage with a 15-year term could save you tens of thousands (or more) in total interest versus a 30-year fixed loan. If refinance rates are much lower than they were when you bought your home, a 15-year term may be worth considering.
  4. Track when your ARM will reset. Adjustable-rate mortgages (ARMs) are a nice option for short-term savings on your mortgage, but after the introductory rate ends, your payment could change. The mortgage payment schedule you receive with your ARM disclosures will remind about this time frame, as well as how much the payments could go up. You may want to consider refinancing your ARM into a fixed-rate loan before it resets if current rates are favorable.
 

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