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Mortgage Amortization: Breaking Down Your Mortgage Payments And Understanding Your Amortization Schedule

4-Minute Read
Published on January 27, 2021
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In simple terms, amortization is the schedule of payments over the course of your mortgage. The history of the word “amortize” stems from Old French, literally meaning “to kill.” When your mortgage fully amortizes, it’s paid off for good.

While it may sound intimidating, it’s worth understanding what amortization means for your mortgage and monthly payments. Knowing what your amortization schedule looks like can help you decide if it would be more cost-efficient for you to be making additional payments on your mortgage.

What Is Amortization?

Mortgage amortization refers to a loan’s schedule of repayment. It’s how much you’re paying each month and the factors that make up that payment.

As your loan amortizes, you’ll pay more and more to principal. This is a huge part of building home equity. Your home equity is the difference between what you owe on your mortgage and how much your home is worth.

Without factoring in an escrow account, a basic mortgage payment consists of two components: principal and interest. Let’s take a closer look at both of these.

Principal

This is the loan balance. It’s the amount of money you initially borrowed that you are paying back. As more of your principal is paid off, you’ll pay less in interest. It takes a while before your mortgage payments start to really make a dent in paying off your principal; when you first start making payments, most of your monthly payment will be put toward paying interest.

Interest

This is how lenders make their money. All loans come with an interest rate, which is taken as a percentage of the principal. A mortgage calculator can tell you how much interest you’ll pay over the life of a loan.

For example, if you take out a 30-year loan for $200,000 with a 3.0% interest rate (3.059% APR), assuming you don’t make any extra payments, you’ll end up paying a total of $103,554.90 in interest (in addition to paying back the original $200,000).

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How Do My Loan Payments Change Over Time?: Understanding Your Amortization Schedule

With a traditional mortgage, your payment will remain the same total amount every month. The makeup of that payment will change throughout the repayment of the loan. When you first start paying off the loan, most of your payment will go toward paying interest.

However, 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 Formula

A mortgage amortization formula is the mathematical process of figuring out your monthly mortgage payment. This formula takes three variables – the principal you owe, the length of your loan in months and your interest rate – and calculates how much you will pay per month.

We’ll use our example of a 30-year fixed-rate mortgage of $200,000 at an annual interest rate of 3%.

First, we’ll take your annual interest rate (0.03) and divide it by 12 to get your monthly interest rate (0.0025). Add 1 to get 1.0025.

Next, we’ll take the number of years in the mortgage (30) and multiply it by 12 to get the number of monthly payments (360).

We’ll take our interest rate number (1.0025) and raise it to the power of 360. On your calculator, this function is represented by an “xy” symbol or you can type it using the carrot symbol (^).

1.0025360 = 2.46 (rounded)

We’ll now plug this into a formula with our monthly interest rate (0.025) and work it out from there:

(0.0025 x 2.46) / (2.46 – 1) = 0.00615 / 1.46 = 0.0042 (rounded)

Still with us? Don’t worry. We’re almost there. The final step is multiplying 0.0042 by the principal of your mortgage.

0.0042 x 200,000 = 840

This $840 is our estimated monthly payment, not including escrow.

Is all this math too much? Checkout our mortgage amortization calculator. All you need to do is plug in your interest rate, mortgage term and loan amount. It will do the rest for you.

Sample Amortization Table

Mortgage 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 3% interest:

Month

Payment

Amount of Interest

Amount of Principal

Remaining Balance

1

$843.21

$500.00

$343.21

$199,656.79

2

$843.21

$499.14

$344.07

$199,312.73

3

$843.21

$498.28

$344.93

$198,967.80

4

$843.21

$497.42

$345.79

$198,622.01

357

$843.21

$8.38

$834.83

$2,517.03

358

$843.21

$6.29

$836.92

$1,680.11

359

$843.21

$4.20

$839.01

$841.11

360

$843.21

$2.10

$841.11

$0.00

 

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.

What About Overpaying?

Making your monthly mortgage payment may be stressful enough, but if you can, overpaying your mortgage has its benefits. If you’re able to do so, paying more now can potentially save you tens of thousands of dollars down the road.

The Benefits Of Mortgage Overpayment: An Example

Let’s go back to our $200,000, 30-year fixed loan. Your monthly payment on that loan, not including taxes and insurance, would be $843.21. However, if you were to make an additional monthly payment of $50, you’ll save yourself around $10,000 in interest and shave a few years off the length of the loan as well.

Not everybody has the extra money to do this, and those who do might find their money better put toward other things, such as investing.

Watch Out For Prepayment Penalties

You’ll also want to watch out for prepayment penalties. Typically, you’ll only be able to pay off 20% of the loan balance in a given year or you may face prepayment penalty fees. This restriction can include selling the home or refinancing the loan, so be sure to consult the fine print of your mortgage before making any big moves in regard to your loan. Rocket Mortgage® does not have any prepayment penalties.

Want to figure out the amortization of your mortgage? Check out this easy-to-use mortgage amortization calculator to get a breakdown of your monthly payments and find out how much you could be saving by making additional payments. Need a mortgage or looking to refinance? Apply online today. 

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