You’ve finally bought your dream home and have started making payments to your lender. Now you may be wondering, where exactly do your payments go? That’s where mortgage amortization comes in.
An important part of having a mortgage is understanding when your mortgage amortizes — this is when you go from paying towards your mortgage’s interest to mostly paying down the principal amount of debt. If you’re looking to save money on your mortgage amortization, there are a few ways to see if you’re eligible to reduce the amortization window.
What is a mortgage amortization?
Mortgage amortization is when you pay-off of your mortgage using a schedule and set monthly payments. These fixed monthly payments remain the same throughout your loan, whether that’s 15 or 30 years, and do not change over time — unless you choose to pay more than your monthly payment. This allows for predictability as you pay your loan over time.
Before we go into exactly how a mortgage amortizes, here are some helpful terms to know:
- Interest: Interest is the percentage a lender charges on the amount you’ve borrowed.
- Principal: Principal is the actual amount of money you’ve borrowed from your lender.
What does mortgage amortization do for homeowners?
Mortgage amortization gives homeowners a predictable schedule to follow while paying off their mortgage. Homeowners have money going towards both their interest and principal each month on this set schedule for the life of their loan to eliminate outstanding debt and increase their home equity value.
How does a mortgage amortization schedule work?
At the beginning of your loan, you’ll likely be paying more towards interest than principal. As your interest depletes, you’ll start paying more towards your principal and earn more and more home equity later in your loan. But every month your payment will still look the same.
So, let's say you pay $500 a month towards your mortgage. In the beginning, $400 would go to your interest and $100 towards your principal. Down the line, it will slowly flip to $100 towards interest and $400 towards your principal. You build equity faster further into your loan because you start making bigger payments towards your principal.
How do you calculate your mortgage amortization?
If you want to figure out how much interest you owe on your loan and see how your mortgage amortizes over time, the following steps will give you an idea of how to plan out your payments.
Let’s say you have a 15-year mortgage loan for $350,000 at 3.1 percent interest. Your monthly payment is around $1,265. Using this example, here’s how to calculate your mortgage amortization:
- Take the total loan amount and multiply it by the interest rate determined by your lender – that'll represent your annual interest payment amount. The math will look something like this: $350,000 x .031 = $10,850.
- Divide the annual interest payment amount by twelve to determine your first monthly interest payment. $10.850/12 = $904.16
- Now, subtract this interest amount from your monthly payment to calculate how much you're paying for the principal: $1,265.00 - $904.16 = $361.00
- Now, update the loan balance to reflect the first payment and repeat this process every month until you reach a principal balance of zero.
How to reduce your mortgage amortization
- Make extra payments: Although you have a 12-month schedule, making 13 plus payments can potentially shave years off your loan. Our extra payments calculator can help you estimate how much you can save when you make additional payments on your home mortgage.
- Refinance your loan: Down the line, you may be able to refinance for lower interest rates.
- Make more frequent payments: Set up a bi-weekly payment schedule rather than monthly. More frequent payments can help you beat the amortization schedule.
- Pay more up front: A larger down payment can help with lower interest rates. If you’ve already made your down payment, see if your lender accepts a lump sum of money towards your principal.
Learning how to save money on a mortgage amortization can help plan for your financial future, understand where your monthly payments go, and how to better prepare for buying your new home. With this new knowledge in your homebuying toolkit, you’re able to buy your next home with a deeper understanding of your payment options.