What is mortgage amortization?

Mortgage amortization is the process of paying back your mortgage with periodic payments of principal plus interest.

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Key Takeaways

  • Mortgage amortization is the process of paying off your mortgage

  • An amortization schedule shows how much you’re paying in interest and how much you’re paying in principal each month

  • Your payment is mostly interest at first, but as you pay down the loan, the interest gradually decreases while the principal payment increases

When you look at your first mortgage statement, you’ll notice you’re paying mostly interest and only a small portion is going toward the mortgage balance. But in subsequent years, you’ll gradually start paying down more of the loan and less will go toward interest. This process is called mortgage amortization.

Amortized mortgages are designed to be paid off completely over the number of years dictated in your mortgage terms. If you have a 30-year fixed rate mortgage, you’ll pay off the loan over 30 years, in 360 equal monthly payments.

Your amortization table, also called an amortization schedule, helps you visualize how much of your payment is going toward the balance and how much is going toward interest at different points in the mortgage term. Amortization tables are typically provided by mortgage companies and are a good way to analyze your loan and find out how much equity you have in the home.

How does mortgage amortization work?

Mortgage amortization is simply the process of making incremental, periodic payments to pay back your mortgage over a designated term. An amortized payment consists of two parts: principal, and the interest you pay on the remaining principal.

Since your balance is at its highest at the beginning of the mortgage, your first mortgage payments will be mostly interest. As you pay off the loan, less and less of your payment will go toward interest and the amount that goes toward the principal will increase.

Understanding an amortization schedule

As we touched on earlier, your lender uses an amortization schedule to show exactly how much is going toward the principal and how much is going toward interest each month. An amortization schedule also shows what your balance is at the beginning of each payment, what your balance will be after the payment for each period is made, and the cumulative interest paid. (Depending on how high your interest rate is, you may end up paying more in interest than principal throughout the life of the mortgage).

How amortization schedules can be useful

For borrowers, amortization schedules are a good way to gauge how much home equity you’ll have at different points in the mortgage term. The more principal you pay off, the more home equity you have, which means you own a larger percentage of the house. With that equity, you’re more likely to sell the home at a profit. You can also borrow against the equity and get a second mortgage that you can use for home improvement projects. These are just a few of the reasons having an amortization schedule on hand can be useful.

Your lender references your amortization schedule to determine when to stop charging you for private mortgage insurance (PMI). Private mortgage insurance is required by lenders if you make a down payment of less than 20%, and you can only get rid of it once you’ve established enough equity to give you an 80% or lower loan-to-value (LTV) ratio (the loan as a percentage of your home’s value).

Your lender will automatically cancel PMI once your LTV hits 78% according to your amortization schedule. (But you can request that your bank cancel PMI earlier than the amortized cancellation date once your LTV reaches 80%, provided you have a good payment history and you hire a bank-approved appraiser to assess the home’s value.)

Amortization schedule example

When looking at an amortization schedule, keep in mind that it’s more of a guide, and less what you have to pay. If you decide to make a $1,500 payment instead of the scheduled $1,362.69 payment, for example, that $137.31 extra will go toward paying down the balance. If you do that every month for a year, that’s $1,647.72 trimmed from your balance annually. If you can afford it, contributing an extra amount each month can help you establish more equity and lower the following month’s interest payment.

The following table is the amortization schedule for a 30-year fixed rate mortgage. As you can see, on a $240,000 loan with a 5.5% interest rate, you’ll end up paying more in cumulative interest than the loan itself.

Barring any extra payments, missed payments, or a potential change in your interest rate, this is what your amortization schedule will look like.

Payment #BalancePaymentPrincipalInterestRemaining balanceCumulative interest paid
Payment 1$240,000$1,362.69$262.69$1,100.00$239,737.31$1,100.00
Payment 2$239,737.31$1,362.69$263.90$1,098.80$239,473.41$2,198.80
Payment 3$239,473.41$1,362.69$265.11$1,097.59$239,208.30$3,296.39
Payment 4$239,208.30$1,362.69$266.32$1,096.37$238,941.98$4,392.76
Payment 5$238,941.98$1,362.69$267.54$1,095.15$238,674.44$5,487.91
Payment 10$237,591.95$1,362.69$273.73$1,088.96$237,318.22$10,945.15
Payment 20$234,797.49$1,362.69$286.54$1,076.16$234,510.95$21,764.82
Payment 40$228,810.19$1,362.69$313.98$1,048.71$228,496.21$43,003.94
Payment 60$222,249.50$1,362.69$344.05$1,018.64$221,905.45$63,667.03
Payment 120$198,551.05$1,362.69$452.67$910.03$198,098.38$121,621.60
Payment 180$167,370.90$1,362.69$595.58$767.12$166,775.33$172,060.17
Payment 240$126,347.07$1,362.69$783.60$579.09$125,563.47$212,609.93
Payment 300$72,371.86$1,362.69$1,030.99$331.70$71,340.87$240,148.95
Payment 360$1,356.48$1,362.69$1,356.48$6.22$0.00$250,569.70

To find out what kind of mortgage you can afford, check out our mortgage calculator

How to calculate mortgage amortization

Calculating a mortgage payment is fairly simple. For your $240,000 30-year fixed rate mortgage with a 5.5% interest rate, your monthly payment would be $1,362.69 (according to our calculator). To figure out how much interest you’re paying each month, you take the rate (5.5%) and divide it by 12. What you get is a periodic interest rate of 0.458%.

That means for your first payment, you’d pay $1,100 in interest ($240,000 x 0.00458), and the $262.69 difference between the total payment and the interest ($1,362.69 – $1,100) would go toward the principal. Your second payment is a slightly lower interest payment and higher principal payment. Under a 30 year mortgage, this process is repeated 360 times until the loan is fully paid off.