The New Homeowner’s Guide to Mortgage Amortization

As you start your home buying journey, you’ll probably hear the term mortgage amortization, but you might not know exactly what it means and how it works.

Here, you’ll learn about the amortization process and how it impacts your monthly mortgage payment.

What is Mortgage Amortization?

In the most basic terms, mortgage amortization is how your loan gets paid down over your loan term. When you get your mortgage terms, you’ll pay a set amount over a pre-determined period—for example, $1,500 a month for a fixed-rate 30-year loan.

At the start of your mortgage, the vast majority of your payment will go to interest. Over time, the amount of your monthly payment that goes to interest will decrease while the portion applied to the payment’s principal increases. Eventually, as you approach the end of your loan term, the vast majority of your payment will go to the principal.

How is Mortgage Amortization Calculated?

An amortization calculator uses the following information to calculate your mortgage payment:

• The total amount of your loan
• Your interest rate
• Your down payment percentage
• The time you’ll have to pay your loan

Understanding Your Mortgage Payment Schedule

An amortization schedule/chart is a detailed listing of the number of total payments in your mortgage and exactly how much of each payment goes to interest and principal. It also shows the remaining principal balance on your mortgage.

When you look at your amortization schedule, you can see exactly how much of your payment will go to interest and principal throughout your loan. The principal plus the interest on each payment will add up to what you owe each month.

How to Read a Mortgage Amortization Schedule

Your standard mortgage amortization schedule will have a few columns you’ll want to pay attention to as you read it.

• Payment number: For a 30 year fixed mortgage, this will go from 1 to 360, listing one payment for each month
• Date: This is the day your mortgage is due each month; it will usually be the same day, the first of the month
• Rate: Here is your interest rate on the mortgage; for a fixed-rate loan, it will always be the same
• Payment: This is your monthly payment; with a fixed-rate mortgage, it will always be the same amount
• Principal: Here’s the amount of your monthly payment that’s applied to the principal on your mortgage. At the start, this number will be low, but it will increase over time.
• Interest: This is the amount of your monthly payment applied to your mortgage interest. In this case, the number here will be higher but decrease over the life of your mortgage.
• Balance: The total amount left on your mortgage

If you put down less than 20% on your mortgage, you might have to pay private mortgage insurance (PMI). If that’s the case, there can also be a column with this number on your amortization chart too.

How To Use Your Mortgage Amortization Schedule

Now that you know what mortgage amortization is, and how it works, it’s helpful to know how to use the chart. Here are a few ways in which your mortgage amortization chart can come in handy in the real world:

It can help you figure out:

• The breakdown of interest to the principal in any payment
• How much of the total interest and/or principal you’ve paid on a particular date
• The full principal still owed on your mortgage on a particular date
• How much time you can cut off your mortgage if you make additional payments
• If there’s a potential benefit in refinancing to get a lower interest rate.

The Bottom Line

Understanding mortgage amortization can go a long way to helping you better grasp your mortgage payments and how they work.

As always, we’re here to answer any questions you have and help guide you through the mortgage loan process. Give us a call or start your application today.