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Mortgage Amortization Schedule Definition

Victoria Araj5-minute read

June 19, 2021


As soon as you start making payments on your mortgage, your loan will start to mature using a process called amortization. Amortization is a way to pay off debt in equal installments that includes varying amounts of interest and principal payments over the life of the loan. How much of your total payment goes to each of these elements is determined by something called an amortization schedule.

Read on to learn all about how amortization schedules work and to calculate your amortization schedule to find out how much you’re actually paying toward your principal each month.

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Mortgage Amortization Schedule, Defined

An amortization schedule is a fixed table that lays out exactly how much of your monthly mortgage payment goes toward interest and how much goes toward your principal each month, for the full term of the loan.

Most of your money goes toward interest during the first years of your loan. As your loan matures, more of your payment goes toward principal and less of it goes toward interest.

This doesn’t mean that your mortgage payments get smaller as time goes on – amortization schedules are structured so that you pay the same amount each month. In other words, the principal and interest are just distributed differently as time goes on.

Lenders use an amortization schedule to show you in detail how each periodic payment on your amortizing loan will ultimately end with your complete loan repayment.

How An Amortization Schedule Works

To calculate the amount of interest paid each month, your interest rate is divided by 12 before being multiplied by your current mortgage balance. This will give you the interest in the current month of your term. After that, the principal is added when they figure out how much of your balance needs to be paid in that particular month in order to pay off your loan by the end of the term.

This is recalculated on a monthly basis because your mortgage balance gets a little bit smaller every month. A smaller balance means less interest paid and there’s a gradual shift over time.

How Understanding Amortization Can Save You Money

Once you understand amortization, you can work out a strategy to save money and pay off your loan. By making extra payments on your mortgage that are specifically directed to be put toward the principal, you’ll pay less interest and pay off your loan quicker.

And, as you build equity in your home, your principal accrues less and less interest and more of your money goes toward paying off your principal balance. Even a small additional principal payment can save you thousands of dollars in interest down the road.

Before embarking on this strategy, it’s important to know whether your mortgage lender charges a prepayment penalty – a fee for paying off your loan within a certain number of years after taking it out. Quicken Loans® doesn’t charge prepayment penalties, but if your lender does, it’s important to time it so that you pay off your loan early, but after the penalty period.

Mortgage Amortization Schedule Example

Even if you understand what amortization is, it can be complicated to think about in terms of dollars and cents. Let’s work through an example to illustrate the amortization process.

Let’s say you take out a 30-year mortgage with a $200,000 principal and a fixed 4% interest rate. Your lender tells you that your monthly payment is $954.83 before taxes and homeowners insurance, but where does that money actually go? In the first month, your payment goes almost entirely toward interest: $665.71 goes toward interest and only $288.16 goes toward principal.

Every month, this process repeats itself and you pay less and less toward interest. By the time you pay off the loan, you will have paid your original $200,000 loan as well as $143,738.99 in interest.

Let’s say that you take out the same 30-year fixed rate loan worth $200,000 with 4% interest annually. Your monthly payment is still $954.83, but let’s say you pay an extra $100 per month toward principal. At the end of your loan, you will have saved $26,854.95 in interest. That’s 59 months of payments saved – almost 4 years!

The Bottom Line On Amortization Schedules

Now that you understand how your mortgage payment is calculated and how the amounts of principal and interest change over time, you can see the power of understanding amortization in helping you save money by paying off your loan early.

If you’re ready to use this newfound knowledge when you buy a home or refinance, you can get started with Rocket Mortgage® by Quicken Loans.

Take the first step toward the right mortgage.

Apply online for expert recommendations with real interest rates and payments.

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Victoria Araj

Victoria Araj is a Section Editor for Quicken Loans and held roles in mortgage banking, public relations and more in her 15+ years with the company. She holds a bachelor’s degree in journalism with an emphasis in political science from Michigan State University, and a master’s degree in public administration from the University of Michigan.