When you buy a home or refinance your loan, you might start thinking about just how long it will take to pay off that mortgage and how those payments will be applied. A mortgage amortization schedule shows you exactly how much of each payment goes toward principal and interest each month, along with your final payment date.
Learn more about how mortgage amortization works and why it’s important to understand.
What Is Mortgage Amortization?
Mortgage amortization refers to the process of making regular monthly payments in order to pay off your mortgage loan.
Beyond giving you the amount of your monthly payments and the term of your loan, an amortization schedule also shows your mortgage payment breakdown, including the amount that goes toward the loan balance and the amount that goes toward interest. You will notice that amortized mortgages apply a larger portion of the mortgage payment towards interest in the beginning of the loan, while a higher percentage of the payment applies to the principal near the end of the loan.
Keep in mind that property taxes and homeowners insurance payments are typically included in your monthly mortgage payment if you have an escrow account. Since they don’t play a role in paying down your loan balance, they are not part of a mortgage amortization.
How Mortgage Loan Amortization Works
Home loan payments are made on a mortgage amortization schedule based on your loan term. They’re calculated so that you pay the full loan balance plus the interest you owe until your last scheduled mortgage payment.
The exact process varies depending on the type of interest rate you have:
- Fixed-rate mortgage: Your payment is calculated based on your interest rate and loan term. The total amount may change as a result of adjustments in property taxes or insurance costs, but it won’t impact the principal and interest.
- Adjustable-rate mortgage (ARM): 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.
No matter what type of mortgage you have, principal and interest impact how the entire balance is paid off. The principal refers to your loan balance, while interest refers to the amount you owe your lender in exchange for borrowing money.
How do you know how much of your payment goes toward principal and how much goes toward interest? The answer is your mortgage amortization schedule.
What Is A Mortgage Amortization Schedule?
A mortgage amortization schedule is a table that shows how each monthly loan payment is divided between principal and interest payments. The total amount remains the same with a fixed-rate mortgage, but the makeup of that payment changes month by month.
When you first start paying off the loan, most of your payment will go toward interest. Over time, the amount of interest you’ll pay will decrease. As a result, a larger share of your payment will be applied toward principal, increasing the speed with which you build home equity.
Mortgage Amortization Schedule Example
Mortgage lenders use amortization tables to map out the loan repayment schedule. These tables show the change in payment makeup as the loan is repaid. Here’s an example of a mortgage amortization schedule for a 30-year fixed-rate mortgage of $200,000 at 6.5% interest, including how much of each payment goes toward principal and interest:
| Month | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $1,264.14 | $1,083.33 | $180.81 | $199,819.20 |
| 2 | $1,264.14 | $1,082.35 | $181.79 | $199,637.42 |
| 3 | $1,264.14 | $1,081.37 | $182.77 | $199,454.65 |
| 4 | $1,264.14 | $1,080.38 | $183.76 | $199,270.89 |
| … | … | … | … | … |
| 356 | $1,264.14 | $33.69 | $1,230.45 | $4,988.80 |
| 357 | $1,264.14 | $27.02 | $1,237.12 | $3,751.69 |
| 358 | $1,264.14 | $20.32 | $1,243.82 | $2,507.88 |
| 359 | $1,264.14 | $13.58 | $1,250.56 | $1,257.33 |
| 360 | $1,264.14 | $6.81 | $1,257.33 | $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. The longer you pay your mortgage, the more you pay toward the principal and build equity in your home.
How To Calculate Mortgage Amortization
The easiest way to figure out your mortgage amortization is to use a mortgage amortization schedule calculator. But you can also do a manual calculation using a formula.
To get started, you’ll need a few key pieces of information about the mortgage, including:
- Loan amount
- Interest rate
- Loan term
Here’s the formula for calculating your mortgage payment, followed by an explanation of each variable.
M = P × ((I × (1 + I)T) ÷ ((1 + I)T – 1))
In the formula above, we have the following variables:
M: Monthly mortgage payment
P: Principal (mortgage balance)
I: Interest rate (converted to monthly)
T: Term length in months
Complete the following steps. We’ll use the numbers from the example above:
- Loan amount = $200,000
- Interest rate = 6.5%
- Loan term = 30 years (or 360 months)
- Calculate the monthly interest rate.
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, 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.
- Calculate parentheses raised to a power of the number of months in the term.
First, 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, so the number would be 6.992633.
- Multiply the numerator.
- Multiply the denominator.
- Divide the numerator by the denominator.Assuming you’ve done everything correctly, the payment should be $1,264.14 when rounded to the nearest cent.
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.
- Calculate the interest column by multiplying the remaining balance by the monthly interest rate.
- Calculate the principal column by subtracting the interest column from the total monthly payment.
- Find the new remaining balance by subtracting the principal paid from the previous remaining balance.
- Repeat steps 6 – 8 until you reach the end of your loan term.
FAQ
Find out if your lender charges a prepayment penalty. Normally, this applies only to paying off the full balance within the first three to five years, but check your loan agreement for details.
Amortization Calculator
Use our amortization calculator to see how your monthly payment breaks down and how additional payments can save you money on interest.
The Bottom Line: A Mortgage Amortization Schedule Is A Helpful Tool
A mortgage amortization schedule shows how your payments are applied to principal and interest each month. Looking at these numbers and using a mortgage amortization calculator can inspire you to make extra principal payments and pay off your loan balance early, ultimately reducing how much interest you pay.
Ben Shapiro
Ben Shapiro is an award-winning financial analyst with nearly a decade of experience working in corporate finance in big banks, small-to-medium-size businesses, and mortgage finance. His expertise includes strategic application of macroeconomic analysis, financial data analysis, financial forecasting and strategic scenario planning. For the past four years, he has focused on the mortgage industry, applying economics to forecasting and strategic decision-making at Quicken Loans. Ben earned a bachelor’s degree in business with a minor in economics from California State University, Northridge, graduating cum laude and with honors. He also served as an officer in an allied military for five years, responsible for the welfare of 300 soldiers and eight direct reports before age 25.
