Calculating Mortgage Amortization (2024)

When getting your first mortgage loan, you shouldn’t have to wonder whether you can know in advance how much you’ll pay each month (before taxes and insurance).

Thanks to an amortization schedule, you’ll never be in the dark. It’s a table that lists how many monthly mortgage payments you’ll make, the amount you’ll be sending to your lender with each payment and how much will go toward principal and interest. Let’s take a closer look at how mortgage amortization works.

What Is Mortgage Amortization?

Amortization in real estate refers to the process of paying off your mortgage loan with regular monthly payments. These payments are made in equal installments over the life of the loan, though because the payment amount consists of principal and interest, it can vary. The amortization period refers to how long it will take to pay off your mortgage in full.

Amortization With Fixed-Rate Mortgages

Maybe you have a 30-year fixed-rate mortgage. Amortization with this loan type means you’ll make a set payment each month. If you make these payments for 30 years, you’ll have paid off your loan.

The payments with a fixed-rate loan – a loan in which your interest rate doesn’t change – will remain relatively constant. They might rise or fall slightly if your property taxes or insurance costs jump or dip.

Amortization With Adjustable-Rate Mortgages

An adjustable-rate mortgage (ARM) works differently. In this type of loan, your interest rate will remain fixed for a certain number of years, usually 5 or 7. After this, your rate will change periodically – depending on the type of ARM you took out – according to the performance of whatever economic index your loan is tied to. This means that your rate could rise or fall after the fixed period, causing your monthly payment to do the same.

Amortization with adjustable-rate loans means the same as it does with fixed-rate versions: It’s simply the process of making regular monthly payments – even though they might vary over time – to steadily pay off your mortgage.

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What Is A Mortgage Amortization Schedule?

An amortization schedule, often called an amortization table, spells out exactly what you’ll be paying each month for your mortgage. The table will show your monthly payment, how much of it will go toward your loan’s principal balance, and how much will be used on interest.

When you first start paying off your mortgage, most of your payment will go toward interest. After you’ve been making payments for several years, this will start to shift, and most of your payment will be applied to your principal balance.

An amortization table will also show the beginning balance of your mortgage payment each month – and the remaining balance after making your payment.

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How Do You Create A Mortgage Amortization Schedule?

What, then, will your amortization schedule look like? That depends largely on your interest rate and the type of loan you decide on.

Let’s say you’re approved for a 30-year mortgage for $200,000 at a fixed interest rate of 5%. Your monthly payment to pay off your loan in 30 years – broken down into 360 monthly payments – will be $1,074, not counting any money you must pay to cover property taxes and homeowners insurance.

In the table below, you can see that a whopping $833.33 of that first payment will go toward interest, with only $240.31 dedicated to principal. That first payment will reduce the principal balance of your loan to just over $199,759.

Gradually, a larger portion of each payment will go toward principal, and less will go to interest. For instance, by payment number 351, only $43.73 of your payment will go toward interest while $1,029.92 goes toward reducing your principal balance.

Monthly Mortgage Amortization Schedule Example

The Importance Of Understanding Your Amortization Schedule

By studying your amortization schedule, you can better understand how making extra payments can save you a significant amount of money. That’s because of interest. The faster you whittle down your principal balance, the less interest you’ll pay.

Mortgage Amortization Acceleration Example

Here’s an example: Let’s suppose you take out the same 30-year, fixed-rate loan of $200,000 with an interest rate of 5%. If you put $100 extra toward your principal balance with each monthly mortgage payment, you’ll save $37,069 in interest payments over the life of the loan.

That’s a big impact from just $100 a month. It’s why understanding how your monthly payments are applied and the savings you can generate by paying a bit more each month can help you financially in the long run.

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How To Use A Mortgage Amortization Schedule Calculator

Homeowners can calculate their mortgage amortization by using an online amortization calculator. You’ll add in information pertaining to your loan, and then these calculators will use a formula to calculate your mortgage amortization. To use a mortgage amortization calculator, follow these simple steps:

Step 1. Type in your loan amount.

Step 2. Type in your interest rate.

Step 3. Type in your loan term.

Step 4. Type in your loan start date.

Step 5. Type in and include the frequency, amount and start date of any extra payments you make (if applicable).

Play with our amortization calculator to see how different interest rates and terms impact your monthly payment. You can also see how making extra payments toward your principal impacts your interest savings and allows you to pay off your loan faster.

How Do Lenders Determine Your Monthly Mortgage Payment?

To determine the amount of interest you’ll pay each month – and, indirectly, your monthly mortgage payment – your lender will divide your loan’s interest rate by 12 to calculate your monthly interest rate. Your lender then multiplies your current loan balance by this figure to determine how much interest you’ll pay in a given month.

Your lender will then determine how much of a payment you’ll need to make each month to pay off your loan by the end of your term, whether that term is 15 years, 30 years or some other number.

This is why you pay more interest at the beginning of your loan’s term than you do in later years: Each time you make a monthly payment, the balance of your mortgage gets slightly smaller. That smaller balance means you’ll pay less interest over time.

Mortgage Amortization FAQs

Here are helpful answers to some of the most frequently asked questions regarding mortgage amortization.

How does an amortization schedule for a mortgage work?

A mortgage amortization schedule is often in a table format with several columns to show a complete breakdown of your monthly mortgage payment. It’ll show how much of your payment is going toward interest and principal throughout the life of the loan.

What is negative amortization?

Negative amortization happens when the interest of a certain debt is higher than the monthly payment; so, your interest payment is more than your minimum monthly payment. This causes the overall debt to continue to increase.

How do principal and interest impact mortgage amortization?

Since principal and interest are two main components of your mortgage payment, portions of your payment will go to both. At the beginning of paying off your mortgage, the majority of your payment will go toward interest, but after several years, most of your payment will go toward your principal balance. This payment shift is shown in an amortization table.

Can I pay off my mortgage early?

After learning about mortgage amortization, you may be wondering if it’s worth it to pay off your mortgage early. While making biweekly payments or paying extra toward your principal each month can save you thousands in interest over time, you’ll want to make sure you won’t face a prepayment penalty if you pay off your mortgage early.

The Bottom Line

You’ll be hit with plenty of numbers when you take out a mortgage. Make it a priority to review your mortgage amortization schedule. It’s important to know exactly how much you’ll pay each month.

By analyzing just how much money from each of your payments – especially in the early days of your loan – goes toward interest, you might be inspired to pay extra each month to drive down that principal balance.

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