What is a mortgage amortization schedule?

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When you pay your mortgage each month, you know that part of it goes toward interest and part toward reducing your balance. Exactly how each payment is divided is determined by an amortization formula and changes a bit each month. A mortgage amortization schedule shows how each payment is divided from the first payment to the last.

Understanding amortization can help you understand where your money goes each month and how quickly you're building equity in your home.

What is mortgage amortization?

Amortization is a method for calculating loan payments that ensures all mortgage interest is paid and the balance is retired in a specific loan term.

Amortization calculates a payment amount that covers all the interest that has accrued since your last payment, with the remaining amount applied to your principal.

At the start of your loan term, most of your payment goes toward interest, with a small amount applied to reducing the balance. But each month, you'll pay less interest, and more of your payment will be applied to the principal. This continues until the entire balance is paid with the final scheduled loan payment.

An amortization schedule calculates how much of each payment goes toward interest and principal. Your lender can provide you with your amortization schedule, or you can enter your loan balance, interest rate, and loan term into an amortization calculator.

Amortization applies only to the principal and interest on your mortgage. It does not include significant annual costs like homeowners insurance and property taxes, which often are paid with monthly contributions to an escrow account and paid on your behalf when due.

Amortization with fixed-rate mortgages

The mortgage rate on a fixed-rate loan doesn't change. That means you can calculate the amortization schedule up front and know how much each mortgage payment for principal and interest will be for your entire loan term.

This locks in the largest portion of your mortgage payment and makes your housing expenses more predictable.

This applies only to principal and interest. If you pay property taxes and homeowners insurance with an escrow account, those expenses may increase over time. You also may have to pay homeowners association (HOA) fees or mortgage insurance, which you may be able to cancel depending on your loan type.

Amortization with an adjustable-rate mortgage (ARM)

An adjustable-rate mortgage has an interest rate that is fixed for an introductory period, then adjusts at specific intervals based on market conditions. ARMs typically have rate caps that limit how much the rate can change in any one adjustment and the maximum rate the loan can reach.

When your interest rate adjusts, your lender will reamortize your loan to keep repayment on schedule. If interest rates go up, the interest portion of your loan will increase. If rates fall, the interest portion of your payment will decrease.

Either way, if you have a 30-year ARM, adjustments will not change your loan term.

How to use a mortgage amortization calculator

The Rocket Mortgage amortization calculator can help you understand your monthly payment and how it's applied to interest and principal over the life of your loan.

To get started, you'll need to:

1. Enter your loan amount.
2. Enter your interest rate.
3. Select your loan term.
4. Add your loan start date.
5. Enter the amount and frequency of any extra payments you plan to make.

You can try varying the numbers in the calculator to see how changing the interest rate or loan term can affect your monthly payment. You can also see how making extra payments toward your principal alone may help you save on interest and pay off your loan sooner.

How does the mortgage amortization formula work?

Lenders create amortization schedules using a mathematical formula and the details of your mortgage, like how much you’re borrowing, your interest rate, the loan term, and the type of loan you choose.

Here's what the mortgage payment formula looks like:

M = P x [R(1 + R^T] / [(1 + R)^T - 1]

The variables are:

• M: Monthly payment.
• P: Principal amount. Your loan balance.
• R: Monthly interest rate. Annual rate divided by 12.
• T: Term (in months). This is your total number of payments. For example, a 30-year mortgage has 360 payments.

Once you've calculated the monthly payment, the amortization breakdown is calculated for each month using the loan balance and interest rate.

How do amortization schedules work?

Let’s say you’re approved for a 30-year fixed-rate mortgage for $350,000 with an interest rate of 6.375%. To pay off the loan in 30 years, your monthly payment for principal and interest would be $2,183.54. Remember, this amount doesn’t include property taxes or homeowners insurance.

At the start of the loan, most of each payment goes toward interest. For example, in the first month, you'd pay $1,859.38 in interest, covering the interest that had accrued on the balance since closing. The remaining $324.17 is used to reduce the balance to $349,676.83.

The next month's payment uses that reduced balance to recalculate the accrued interest. The interest on the second payment is $1,857.65, leaving $325.89 to apply to the balance.

The balance decreases over time, accruing less interest each month. That allows more of your payment to go toward the balance. By the final payments, only a small amount goes toward interest, and almost the entire payment is used to pay off the remaining loan balance.

Here's what an amortization table looks like for the first and last 6 months' worth of payments for our example loan.

The schedule also shows it will take 230 payments – 19 years and 2 months – before you're paying more principal than interest.

Making extra payments

You also can use an amortization calculator to see how making principal-only payments toward your mortgage to speed up repayment and pay off your loan early.

If you make only the regular payments on our 30-year loan example, you’d pay about $318,861 in interest, for a total loan cost of $568,861. If you pay $50 extra each month and apply that amount to the principal, you would save about $32,911 in interest. That reduces your total loan cost to $535,950 and pays off your mortgage 2 years and 7 months ahead of schedule.

The importance of understanding your amortization schedule

Your amortization schedule breaks down how much of each payment goes toward interest and your loan balance. It helps you understand how your loan is being repaid and your progress toward reducing your balance.

Understanding your loan balance is important if you decide to borrow against your home equity. The lower your balance, the more equity you likely have.

FAQ

Here are some common questions about mortgage amortization.

What is negative amortization?

When your loan balance increases rather than decreases, that's known as negative amortization. This typically happens when you have a loan that lets you pay only a portion of the accrued interest each month. The unpaid interest is then added to the principal, and you'll be paying interest on the larger amount.

How do principal and interest affect mortgage amortization?

Principal and interest make up most of your mortgage payment. At the start of your loan, most of your payment goes toward interest, while a smaller portion reduces the principal. As you pay down your balance, you accrue less interest, and more of each payment is applied to your principal. Making extra payments specifically toward the principal amount can help you pay off your mortgage earlier and save you money on interest.

Can I pay off my mortgage early?

Yes, making extra payments toward your principal can help you pay off your mortgage early and save on interest. To apply an additional payment to principal only, you'll usually need to let your lender know that the payment is for principal, which you can usually do online or by phone. Some mortgages come with a prepayment penalty, so it’s important to review your loan’s terms and conditions before making any extra payments or paying off your loan early.

The bottom line: Your amortization schedule can help you save money

Think of an amortization schedule like a roadmap for your mortgage. It shows how your home loan is repaid, including how much you owe each month and how each payment is split between interest and principal. When you understand how much interest you’re paying, you may be more motivated to make extra payments toward your principal when possible. Doing so can help you save on interest, build home equity faster, and even pay off your loan early.

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