There are many terms and phrases associated with mortgages that make buying a home a confusing process. One such term is “mortgage amortization.” Simply put, mortgage amortization is the series of monthly payments that consist of your principal and interest. The amount of each payment you make that your lender applies to your principal balance increases over time, which decreases the total amount you owe.
Unfortunately, only a small percentage of the early payments you make go toward the total amount you owe — the principal. With a mortgage amortization table, you can see how much of your monthly payment is applied to the principal balance, how much goes toward interest and how much that changes over time. With a mortgage amortization calculator, you can calculate how much you pay in total by the end of the loan term.
A breakdown of mortgage amortization and how it works gives you a better understanding of the process. With this understanding, you can take control of your financial situation and work toward paying off your mortgage.
What Is Mortgage Amortization?
Amortization refers to paying off a loan in a series of installments. When you obtain a mortgage, you agree to monthly payments, often for a term between 10 and 30 years. These monthly payments include a portion of the amount you borrowed along with interest charges. Mortgage amortization makes it possible for you to pay off the cost of the house without having to pay for it all at once.
How Does Amortization Work?
In most instances, homeowners opt for mortgages with fixed rates. This means that they can expect to pay the same amount every month, which makes it easier to budget accordingly. They amount that you pay in each payment goes toward the principal and the interest. With each payment, the amount that goes toward the principal goes up and the amount that the lender applies towards the interest goes down. In the beginning, you pay more toward the interest you owe than the principal.
The table below illustrates the breakdown of mortgage payments in what is known as an amortization schedule. The loan illustrated below is for a mortgage of $200,000 over a term of 30 years with a fixed interest rate of 4.5%. The monthly payments stay the same at $1,013.37 for all 360 months, but the amount that goes toward the principal varies considerably.
| Month | Principal | Interest | Balance |
| 1 | $263.37 | $750.00 | $199,736.33 |
| 61 | $329.69 | $683.68 | $181,986.15 |
| 121 | $412.70 | $600.67 | $159,766.17 |
| 181 | $516.62 | $496.75 | $131,951.29 |
| 241 | $646.70 | $366.67 | $97,132.75 |
| 301 | $809.53 | $203.84 | $53,547.04 |
| 360 | $1,009.58 | $3.79 | $0.00 |
As you can see, nearly 75% of your first payment goes toward paying interest, with only $263.37 toward the principal. Even after 10 years (121 months), more than 50% of your payment goes toward interest. It’s not until halfway (181 months) through the loan term that you start paying more toward your principal and can really start making a dent in the total amount you owe.
The Pros and Cons of Mortgage Amortization
Mortgage amortization has several advantages and drawbacks. Because most people who want to own a home don’t have the cash to pay for it up front, the benefits usually outweigh the drawbacks. One of the biggest advantages is that amortization provides a way for you to pay off the loan so you can own your home with no strings attached at the end of the loan term.
Building Equity
While amortization is a slow process, you do build equity with each payment that you make. Equity is the amount of the home’s value that you actually own. It may start out at a small percentage, but if you continue making payments, the amount of the house you actually own grows. You can then use the equity to refinance and get cash out for a large expense or other financial need, if necessary.
Front-loaded Interest
The major drawback to mortgage amortization is that the lender tacks all of the interest onto the front, which is at the beginning when you first start making payments. As a result, you pay a lot of money into the loan without building much equity in the beginning. This can be frustrating, because your principal amount decreases slowly in the early years of the loan term. While you make over $12,000 in mortgage payments in the first year, your principal balance only drops a couple thousand dollars.
Refinancing and Amortization
Decades of paying a high monthly mortgage payment can take its toll. Refinancing helps reduce that burden because it lowers your monthly payment. This, along with a lower interest rate, might seem attractive, but it actually can work against you. Because you have a considerable amount of equity in your home after several years of payments, the amount you owe on the loan is greatly reduced. However, if you extend the length of the loan term, then the amortization process starts over again. As a result, you pay even more in interest by refinancing. You can get around this by refinancing at a lower interest rate for a loan term that’s equal to the length of time left on your original loan. For example, if you’ve paid into your 30-year mortgage for 10 years, then your refinance should have a loan term of 20 years.
Paying Your Mortgage Early
The faster you can build up equity in your home, the faster you can pay off your loan. If you stick to the amortization schedule mentioned above, at the end of 30 years, you paid $364,813.20 for a $200,000 loan. With a shorter loan term, you pay less in interest. Thus, making extra payments and paying your mortgage off early can save you a considerable amount of money. Be sure to check the terms of your mortgage. Some lenders don’t allow prepayment, or they may charge penalties for prepayment.
