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What Is Mortgage Amortization and How Does It Work?

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A man stands and points at an ascending red line on a wall.

Buyers taking out a home loan expect to start making mortgage payments every month to pay it off. But what you might not know is that each of those monthly installments will go toward repaying the principal and interest in varying amounts. This process is called mortgage amortization.

The principal is the sum that you borrowed, while the interest refers to the charges imposed on you for borrowing money from the lender. Your mortgage amortization schedule will lay out how much of each monthly payment is allocated to principal and how much is allocated to interest. This paints a picture of how each payment helps pay off your mortgage balance, and keeps your monthly payments predictable over the life of the loan.

Here’s how mortgage amortization works and how it can help you plan ahead:

What Is Amortization?

By definition, mortgage amortization means that you’re repaying a loan in equal installments on a schedule. In the beginning, most of your monthly payment will go toward paying off interest. But as your mortgage loan matures, more of your payment will go toward paying off the principal — which speeds up the rate at which you’re reducing debt.

“Borrowers can use amortization to their advantage by finding an amortization period that aligns with their budgetary reality and ongoing financial balance,” says David Tuyo II, president and CEO of University Credit Union in Los Angeles. “Instead of having to save up for an extended period of time or to use a massive lump sum payment to buy a home, amortization gives borrowers the ability to purchase a home that they may otherwise not be able to afford.”

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How Does Mortgage Amortization Work?

To repay your mortgage, you must pay off both the principal and the interest on that amount. With amortization, your initial monthly payments mostly go toward paying interest. But as you build equity — or ownership — in the home, less interest accrues on your decreasing principal balance, so more of your monthly payment will be dedicated to further reducing the principal.

Even though your debt is shrinking over time, your monthly payments aren’t going to get smaller. The payment amount is allocated differently across the principal and interest, depending on how far along you are in your amortization schedule.

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How Does a Mortgage Amortization Schedule Work?

Your amortization schedule is a table that illustrates how your monthly mortgage payments will contribute to the full repayment of your loan. It shows how much of each payment will go toward the principal and how much will go toward interest over the life of the loan.

The mortgage amortization schedule can be an important tool for the buyer in several ways:

  • Know when to stop paying for private mortgage insurance. The more principal you pay off, the more of the house you own. This information is especially important if you’ve been paying for PMI, because you can cancel it once you reach 20% equity.
  • Make financial plans with more confidence. A fixed schedule shows you how much you’re responsible for paying each month, which can help you budget for the future.
  • Keep track of your progress. The mortgage amortization schedule tells you when you’ll reach 100% equity and finish repaying your loan. If there’s room in your budget to make extra payments, the schedule can be adjusted accordingly.

“You can’t guarantee more income in the future, so you are better off having a stable payment you know you can pay now,” says Lyle Solomon, principal attorney at Oak View Law Group in Auburn, California. “If your circumstances change for the better in the future, refinancing is always an option.”

Keep in mind that your interest rate and loan payments may fluctuate if you choose an adjustable-rate mortgage, which means the amortization schedule isn’t set either. Some lenders provide free copies of your amortization schedule; however, with other lenders, you may need to create it on your own.

Amortization table

Here’s an example of an amortization schedule for a 30-year, fixed-rate mortgage with a $400,000 principal and a 4% interest rate in California.

Amortization Schedule for a $400,000 Mortgage With 30-Year Term and 4% Interest Rate

MonthPaymentInterestPrincipalPrincipal BalanceTotal Interest Paid
0$400,000$0
1$1,909.66$1,331.41$578.25$399,421.75$1,331.41
2$1,909.66$1,329.48$580.18$398,841.57$2,660.89
3$1,909.66$1,327.55$582.11$398,259.46$3,988.44
4$1,909.66$1,325.61$584.05$397,675.41$5,314.05
5$1,909.66$1,323.66$586.00$397,089.41$6,637.71
6$1,909.66$1,321.71$587.95$396,501.46$7,959.42
355$1,909.66$31.51$1,878.15$9,485.07$287,414.83
356$1,909.66$25.25$1,884.41$7,600.66$287,440.08
357$1,909.66$18.97$1,890.69$5,709.97$287,459.05
358$1,909.66$12.67$1,896.99$3,812.98$287,471.72
359$1,909.66$6.34$1,903.32$1,909.66$287,478.06
360$1,909.66$0$1,909.66$0$287,478.06

Note: This table is intended to serve as an example of how amortization works in general. It is not intended to be used for financial advice, or to calculate the exact costs of a specific mortgage. The calculations in this sample amortization schedule were last verified on Aug. 24, 2021.

Once this borrower has finished paying off their loan, they’ll have paid the $400,000 principal plus $287,478.06 in total interest.

One way to reduce the amount of interest you’re coughing up is by making an extra payment toward the principal each month. If the borrower in our example paid an additional $100 per month toward the principal on their mortgage, they could save $29,604.29 in total interest and 33 months of payments. However, some lenders might charge a prepayment penalty if you repay your mortgage too soon, so be sure to check the loan terms.

Amortization chart

This chart illustrates how you’re paying mostly interest for the first several years of the mortgage. By the end of the loan term, you’re paying almost all principal.

Lien graph showing two lines, principal paid and interest paid, for a a $400,000 mortgage with a 30-year term and a 4% interest rate; as time goes on, the principal paid line goes up, and the interest paid line goes down.

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How To Calculate Amortization

Calculating amortization means figuring out the monthly payment for your mortgage.

You’ll need the following information to calculate your monthly mortgage payment:

Loan term in months (N)

Monthly interest rate (R)

Principal (P)

Here’s the formula for mortgage amortization:

A=P*((R*(R+1)^N)/((R+1)^N)-1)

Let’s walk through an example of how to calculate amortization, assuming we have the following information:

  • Loan term: 30 years (or 360 months)
  • Annual interest rate: 4% (or 0.04)
  • Principal: $400,000

First, we need to calculate the monthly interest rate (R). To do this, divide the annual interest rate by 12 months: ­­

0.04/12 = 0.0033

Plug the monthly interest rate (R) and the loan term in months (N) into the formula:

A=P*((0.0033*(0.0033+1)^360)/((0.0033+1)^360)-1)

Solve the parts of the equation within parentheses first:

A=P*((0.0033*(1.0033)^360)/((1.0033)^360)-1)

Next, take care of the exponents:

A=P*((0.0033*3.2741)/(3.2741-1))

Then, work out each part of the fraction:

A=P*(.0108/2.2741)

Finally, solve the fraction and multiply it by the principal to get our approximate monthly payment:

400,000*.0047=$1,900 monthly payment

If we want to calculate the amount of interest (I) being paid each month, divide the interest rate by 12 months and then multiply that number by the current mortgage balance (B).

I=B*(Interest rate/12)

Let’s use the same example and calculate the interest paid on the first month of a 30-year, fixed-rate mortgage with a 4% interest rate and $400,000 balance. Plug those numbers into the formula:

I=400,000*(0.04/12)

Solve the fraction first:

I=400,000*0.0033

Then, complete the equation to get the approximate amount of interest we would pay in the first month of the loan term:

400,000*0.0033=$1,333 interest

From there, we can figure out the principal by subtracting the interest from the monthly payment:

$1,900 - $1,333 = $567 principal

This is a lot of math! So you can use a tool like Freddie Mac’s calculator to calculate amortization instead. Tools like these can create an entire amortization schedule for you.

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Should You Choose a Long or Short Amortization Schedule?

Whether you choose a long or short amortization schedule will depend on your financial situation. If you’re able to afford the higher monthly payments, a shorter amortization schedule can help you save money on interest and get your loan paid off sooner. A longer amortization schedule may be more suitable if you struggle to save or cover all of your monthly expenses.

“Borrowers need to find a balance between their income, their expenses, and their debt in order to maintain a healthy financial budget and leverage debt to their advantage,” Tuyo says.

Benefits of a short amortization schedule

Choosing a short amortization schedule can help you save money in the long run. Here are some of the pros:

  • You may get lower mortgage rates and pay less total interest.
  • You pay off your loan faster.
  • You build equity and own the home sooner.

Drawbacks to a short amortization schedule

There can be some cons to choosing a shorter amortization schedule. Here’s what to look out for:

  • You face higher monthly mortgage payments.
  • There’s more risk due to the financial pressure of committing to larger payments.
  • You may miss out on certain tax benefits depending on the state you live in.

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Changing Your Amortization Schedule

If you want to change your amortization schedule, you can refinance your mortgage. Choosing a shorter amortization schedule can help you pay off the loan sooner and with less interest — but keep in mind that you’ll likely have to make higher monthly payments.

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Amortization FAQ

Here are the answers to some commonly asked questions about amortization.

Why do people choose amortized mortgages?

Amortizing loans are structured to help you achieve your goal of homeownership. They allow you to repay your mortgage on a consistent schedule with a defined end date, which can help you plan financially.
“Amortization helps make it easier to keep track of what you owe,” Solomon says. “Depending on your terms, you may even be able to pay it down quicker if there is no prepayment penalty.”

Are all mortgages amortized?

Not all mortgages are amortized. One example is the balloon loan, which requires a large payment at the end of the mortgage term. These types of loans are viewed as higher risk for buyers who can’t guarantee their future income.

What is the maximum amortization period?

The maximum mortgage amortization period is typically 30 years. Tuyo says that there have been offers on the market that extend amortization periods to 40 years, but those are less common and will depend on the lender.
“In some cases, there are longer amortization periods, as well as home refinancing options that could extend one’s repayment schedule,” Tuyo says. “But in most cases, borrowers will only encounter loan options of up to 30 years.”

Can I pay more than my monthly payment?

If you can afford it, then you may decide to make extra monthly payments. Additional payments reduce the total amount of interest you’re on the hook for and help you repay the loan faster, shortening your mortgage amortization period.
However, if your loan includes a prepayment penalty, the lender could charge you a fee for paying off your mortgage too early. Be sure to check the loan terms before you start making any extra payments.

What expenses are associated with amortization?

The primary expenses associated with amortization come from the mortgage interest rate and the duration of the amortization period, according to Tuyo. He says the longer the repayment period and the higher the interest rate, the greater the expenses will be.
Amortization expenses are generally covered by the total interest charged and the mortgage’s annual percentage rate, which is a figure that represents the yearly cost of the loan, including fees. When deciding between different amortization schedules and mortgage lenders, be sure to factor in APR.

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The Bottom Line on Amortization

What does amortization mean in a mortgage? It’s the idea that your homeowner dreams can become reality by making consistent monthly payments that pay down interest and principal in varying amounts over time. Your mortgage amortization schedule can help you understand how quickly you’re building equity in your home, as well as how much you’ll be paying in total interest. You can even use amortization to your advantage — by paying off your loan early to save money in the long run.

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