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Mortgage Amortization And How To Calculate It

5-minute read

September 17, 2020


As soon as you start making payments on your mortgage, your loan will start to mature using a process called amortization. How exactly does amortization work? We’ll take an in-depth look at what it is and how it helps you reach your ultimate goal of paying off your mortgage.

What Is Mortgage Amortization?

Loan or mortgage amortization is a monthly payment that includes both interest and the principal. An amortized loan is on a fixed repayment schedule that is paid over a set amount of time. Lenders use a tool called an amortization schedule to show you in detail how each periodic payment on an amortizing loan will ultimately end with your complete loan repayment.

How Does Mortgage Amortization Work?

In a nutshell, mortgage amortization works when you make payments on your home loan's interest and principal in amounts that vary over time. 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.

Mortgage Amortization Calculator

Check out an amortization calculator if you’re curious to see your full amortization schedule and analyze how your payment allocations will change over time. You can plug in the loan amount and interest rate that pertains to your mortgage.

By putting in basic loan information like the balance, term and interest rate, you can use the amortization calculator above to see the following:

  • How much principal and interest make up a given payment
  • How much total principal and interest is paid by a given date in the future
  • How much total principal is still owed on the mortgage at some future point
  • You’ll see how much you can shorten the life of the mortgage by making one or more additional payments toward the principal.

When looking at the amortization calculator, you’ll be able to see how much is paid toward interest, but also how much is paid toward the principal to lower the balance with each payment you make. At the beginning of your loan, the vast majority of your payment goes toward interest with very little being put toward the mortgage balance. Later in the loan, this flips and more is put toward the mortgage balance than interest.

One effective way to both save money and pay off your loan sooner is to make extra payments on your mortgage that are specifically directed to be put on the principal and pay down your mortgage balance. You pay less interest and pay off your loan quicker. 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.

What Is A Mortgage Amortization Schedule?

A mortgage amortization schedule is just a detailed repayment plan that shows exactly when your loan would be paid off assuming you made only the scheduled payment amounts on time each month. While your payment, which is usually made monthly, remains fixed, the amount of principal and interest paid changes. Early on in the loan, more money is paid toward interest and principal, but the balance readjusts every month new payments are made. By the end of the loan, almost all the money goes toward principal payment with very little going toward interest.

Let’s run through the mechanics of how this works.

In order 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 off 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.

Mortgage Amortization Schedule Example

Even if you understand what amortization is, it can be complicated to think about it 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 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.

1 $954.83 $666.67 $288.16 $199,711.84
2 $954.83 $665.71 $289.12 $199,422.71
3 $954.83 $664.74 $290.09 $199,132.62
4 $954.83 $663.78 $291.06 $198,841.57
5 $954.83 $662.81 $292.03 $198,549.54
6 $954.83 $661.83 $293.00 $198,256.54
7 $954.83 $660.86 $293.98 $197,962.57
8 $954.83 $659.88 $294.96 $197,667.61
9 $954.83 $658.89 $295.94 $197,371.67
10 $954.83 $657.91 $296.93 $197,074.75
11 $954.83 $656.92 $297.91 $196,776.83
12 $954.83 $655.92 $298.91 $196,477.93
351 $954.83


$923.58 $8,451.98
352 $954.83 $28.17 $926.66 $7,525.33
353 $954.83 $25.08 $929.75 $6,595.58
354 $954.83 $21.99 $932.85 $5,662.74
355 $954.83 $18.88 $935.95 $4,726.78
356 $954.83 $15.76 $939.07 $3,787.71
357 $954.83 $12.63 $942.20 $2,845.50
358 $954.83 $9.49 $945.35 $1,900.16
359 $954.83 $6.33 $948.50 $951.66
360 $954.83 $3.17 $951.66 $0.00

Making extra payments on your loan drastically reduces the amount of interest you pay. When you make an extra payment, the balance goes directly toward your principal. Let’s take a look at how much just a tiny extra payment each month can shorten the life of your loan.

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!

Summary: Why Mortgage Amortization Is Important

Amortization is the process of paying your home loan over a fixed number of years. Every mortgage payment includes two parts: principal and interest. The principal is the part of your loan balance that you owe to your lender or the total loan amount borrowed from your lender, excluding interest. Interest is a fee that your lender charges you to borrow money for a specific length of time. The amount of interest you owe depends on your interest rate and the loan amount – the lower your interest rate, the less you owe in interest.

Your Closing Disclosure includes information on both your principal and your interest rate. When you start paying your loan, most of your monthly payment goes toward interest. As time goes on and your amortization schedule progresses, your principal gets smaller and smaller. That means that you pay less in interest near the end of your loan.

You can pay more than your required monthly mortgage payment toward principal. These payments can drastically reduce the amount of money left on your loan. 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 extra monthly payment can save you thousands of dollars in interest down the road.

Although Quicken Loans doesn’t, some mortgage providers limit how much you can overpay with a prepayment penalty. If your loan includes a prepayment penalty, you may have to pay a fee. Prepayment penalties vary by lender, which is why it’s so important to read and understand all the terms of your loan.

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 online with Rocket Mortgage®by Quicken Loans.

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