When you have a mortgage, your monthly payments are used to pay off the amount you borrowed, along with interest, and sometimes home insurance and property taxes.
The portion that is paid into principal and interest over the life of the loan varies according to what is called an amortization schedule.
Understanding how your mortgage is amortized is important so that you can make a more informed decision about how to pay off your loan, as well as how long and at what cost it will take to pay it off.
What is mortgage amortization?
Mortgage amortization describes the process by which a borrower makes installment payments to pay off the loan balance over a period of time. These payments are split between the principal, or the amount borrowed, and the interest, or what the lender charges to borrow the funds. Lenders structure loans this way in part to reduce their risk if the borrower were to stop making payments.
With a fixed rate mortgage, the monthly payments remain the same throughout the duration of the loan. However, each time you make a payment, the amount of your payment that goes to principal differs from the amount that is applied to interest, even though each payment is made in equal installments.
âAs your loan matures, you can expect a higher percentage of your payment to go to principal, with a lower percentage to interest,â says Nishank Khanna, Marketing Director of Clarify Capital at New York.
The longer the amortization period, the lower your monthly payment. This is because the more you spread out your payments, the less it will cost you each month, simply because there is more time to pay off.
The downside to a longer loan, however, is that more money is spent on interest. Plus, because interest payments are anticipated with a longer mortgage, it takes longer to really reduce the principal and increase the equity in your home – a factor to consider when comparing your loan options.
What is a mortgage amortization schedule?
A mortgage amortization schedule or schedule is a list of all payments and their respective dates. Mortgage amortization schedules are complex and easier to achieve with an amortization calculator. You can use Bankrate’s amortization calculator to find out what your amortization schedule will be based on the loan terms you entered.
âA calculator is needed because of the number of variables involved, including the number of compounding periods, the interest rate, the loan amount, and the ending balance,â says Trevor Calton, professor of real estate finance at Portland State University. in Portland, Oregon.
Sample mortgage amortization schedule
Suppose you took out a 30-year mortgage for $ 250,000 at a fixed interest rate of 4%. Under these conditions, your monthly mortgage payment (principal and interest) would be $ 1,193.54, and the total interest over 30 years would be $ 179,673.77.
Here’s a snippet of what your amortization schedule would look like in this example in the first year of the loan term:
|Dated||Monthly payment||Main||Interest||Total interest||Balance|
|Nov 2020||$ 1,193.54||$ 360.20||$ 833.33||$ 833.33||$ 249,639.80|
|Dec. 2020||$ 1,193.54||$ 361.41||$ 832.13||$ 1,665.47||$ 249,278.39|
|Jan 2021||$ 1,193.54||$ 362.61||$ 830.93||$ 2,496.39||$ 248,915.78|
|February 2021||$ 1,193.54||$ 363.82||$ 829.72||$ 3,326.11||$ 248,551.96|
|March 2021||$ 1,193.54||$ 365.03||$ 828.51||$ 4,154.62||$ 248,186.93|
|April 2021||$ 1,193.54||$ 366.25||$ 827.29||$ 4,981.91||$ 247,820.68|
|May 2021||$ 1,193.54||$ 367.47||$ 826.07||$ 5,807.98||$ 247,453.21|
|June 2021||$ 1,193.54||$ 368.69||$ 824.84||$ 6,632.82||$ 247,084.52|
|July 2021||$ 1,193.54||$ 369.92||$ 823.62||$ 7,456.44||$ 246,714.59|
|August 2021||$ 1,193.54||$ 371.16||$ 822.38||$ 8,278.82||$ 246,343.44|
|Sep 2021||$ 1,193.54||$ 372.39||$ 821.14||$ 9,099.96||$ 245,971.04|
|October 2021||$ 1,193.54||$ 373.63||$ 819.90||$ 9,919.87||$ 245,597.41|
Here’s what your amortization schedule would look like over the past year:
|Dated||Monthly payment||Main||Interest||Total interest||Balance|
|Nov 2049||$ 1,193.54||$ 1,146.82||$ 46.72||$ 179,414.94||$ 12,870.09|
|Dec. 2049||$ 1,193.54||$ 1,150.64||$ 42.90||$ 179,457.84||$ 11,719.45|
|January 2050||$ 1,193.54||$ 1,154.47||$ 39.06||$ 179,496.90||$ 10,564.98|
|February 2050||$ 1,193.54||$ 1,158.32||$ 35.22||$ 179,532.12||$ 9,406.66|
|March 2050||$ 1,193.54||$ 1,162.18||$ 31.36||$ 179,563.47||$ 8,244.48|
|April 2050||$ 1,193.54||$ 1,166.06||$ 27.48||$ 179,590.96||$ 7,078.42|
|May 2050||$ 1,193.54||$ 1,169.94||$ 23.59||$ 179,614.55||$ 5,908.48|
|June 2050||$ 1,193.54||$ 1,173.84||$ 19.69||$ 179,634.25||$ 4,734.63|
|July 2050||$ 1,193.54||$ 1,177.76||$ 15.78||$ 179,650.03||$ 3,556.88|
|August 2050||$ 1,193.54||$ 1,181.68||$ 11.86||$ 179,661.88||$ 2,375.19|
|Sep 2050||$ 1,193.54||$ 1,185.62||$ 7.92||$ 179,669.80||$ 1,189.57|
|October 2050||$ 1,193.54||$ 1,189.57||$ 3.97||$ 179,673.77||$ 0.00|
As shown, the amount of your payment that is applied to principal increases as the mortgage nears maturity, while the amount applied to interest decreases.
Note that this is the case with a typical 30-year fixed rate mortgage. Amortization schedules – and how the payment is split between interest and principal – can vary depending on factors like how much you borrow and your down payment, the length of the loan, and other terms. Using Bankrate’s calculator can help you see what the results will be for different scenarios.
Where to find your amortization plan
Don’t expect your mortgage lender to regularly mail or email you your mortgage amortization schedule. You will likely find this by logging into your lender’s portal or website and accessing your loan information online, but in some cases you may need to contact your lender to request it.
âBorrowers typically need to call their bank or lender to ask about their amortization schedule for an existing mortgage,â says David Druey, Florida regional president of Miami-based Centennial Bank.
At the end of the line
As a borrower, it’s important to understand how amortization works, as your financial needs and situation are likely to change over time.
For example, by looking at your amortization schedule, you can determine whether you need to change your repayment strategy if you are having trouble making your payments.
“For those who may have difficulty paying their mortgage each month, you can, for example, discuss options with your lender, such as refinancing your mortgage or paying only a portion of the debt owed each month,” explains Druey.
You might also consider speeding up your payments or paying off your mortgage early, such as making bi-weekly payments instead of paying monthly. Knowing how your loan is amortizing can help inform your strategy here as well.
âThis prepayment activity reduces your balance in the total number of payments, thereby reducing the amount of interest charged on the next payment, which creates a domino effect and speeds up your loan repayment sooner,â Calton explains.
It’s also wise to consider how long you plan to stay in your home when deciding on the loan term and amortization schedule.
âSuppose, for example, that you bought a starting house with the intention of living there only five years before moving to a larger house,â Khanna explains. âYou expect to make a profit when you sell, but you find that you owe more than the value of the house. This is because of the amortization schedule you have chosen and a slight depreciation [in the] home value.
âIn this scenario, you took a 30-year mortgage over a 15-year loan, and most of your payments went towards interest rather than the principal balance,â Khanna explains.