What is amortization?
Each month, your mortgage payment goes towards paying off the amount you borrowed, plus interest, in addition to homeowners insurance and property taxes. Over the course of the loan term, the portion that you pay towards principal and interest will vary according to an amortization schedule.
If you take out a fixed-rate mortgage, you’ll repay the loan in equal installments, but nonetheless, the amount that goes towards the principal and the amount that goes towards interest will differ each time you make a payment.
Over the course of the loan, you’ll start to see a higher percentage of the payment going towards the principal and a lower percentage of the payment going towards interest.
With a longer amortization period, your monthly payment will be lower, since there’s more time to repay. The downside is that you’ll spend more on interest and will need more time to reduce the principal balance, so you will build equity in your home more slowly.
Amortization isn’t just used for mortgages — personal loans and auto loans are other common amortizing loans. Just like with a mortgage, these loans have equal installment payments, with a greater portion of the payment paying interest at the start of the loan.
Learn more: What is mortgage amortization?
What is an amortization schedule?
A mortgage amortization schedule is a table that lists each monthly payment from the time you start repaying the loan until the loan matures, or is paid off. The amortization schedule details how much will go toward each component of your mortgage payment — principal or interest — at various times throughout the loan term.
How do you calculate amortization?
To use the mortgage amortization calculator, follow these steps:
- Enter your loan amount. In the Loan amount field, input the amount of money you’re borrowing for your mortgage.
- Enter your loan term. In the Loan term field, input the length of your loan. This might be 30 years, 15 years or another time frame.
- Enter your interest rate. In the Interest rate field, input the interest rate you’re paying on your mortgage.
- Enter your loan start date. In the Loan start date field, input the month when you made your first payment.
After you’ve input this information, you can see how your payments will change over the length of the loan. You can use this information to find out how making extra payments will affect how soon you pay off your loan.
Additionally, this calculator can help you:
- Determine how much principal you owe now, or will owe at a future date.
- Determine how much extra you would need to pay every month to repay the full mortgage in, say, 22 years instead of 30 years.
- See how much interest you’ve paid over the life of the mortgage, or during a particular year (though this might vary based on when the lender receives your payment).
- Figure out how much equity you have in your home.
Next steps in paying off your mortgage
If you want to accelerate the payoff process, you can make biweekly mortgage payments or put extra sums toward principal reduction each month or whenever you like. This tactic can help you save on interest and potentially pay your loan offer sooner.
If you can get a lower interest rate or a shorter loan term, you might want to refinance your mortgage. Refinancing incurs significant closing costs, so be sure to evaluate whether the amount you save will outweigh those upfront expenses.
Another option is mortgage recasting, where you preserve your existing loan and pay a lump sum towards the principal, and your lender will create a new amortization schedule reflecting the current balance. Your loan term and interest rate will remain the same, but your monthly payment will be lower. With fees around $200 to $300, recasting can be a cheaper alternative to refinancing.