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What Is Mortgage Amortization? How it Works and How to Calculate

Mortgage amortization can be defined as the process of paying down your home loan to $0. But knowing your amortization schedule can also help when it comes to home equity and coming up with a strategy to pay off your mortgage early.

Here’s what you should know about mortgage amortization, how it works, and how to calculate your mortgage amortization schedule.

What Is Mortgage Amortization?

Mortgage amortization is the repayment process of the principal and interest on your home loan until your balance reaches $0 at the end of the term. Each mortgage payment has a fixed amount and date that’s paid each month. 

Mortgages aren’t the only amortized loans; auto loans, personal loans, and home equity loans follow this type of repayment process as well.

Although your monthly mortgage payment stays the same every month, the percentage of each payment going to the principal and interest can change over time.

In the first several years, a greater percentage of each payment goes toward interest because your loan balance is still high. As the years go by, more of each payment will go toward paying down the principal as you owe less interest.

Each mortgage payment you make also builds home equity, which is the amount of your home that you own free and clear from the remaining balance on the mortgage.  

How Does a Mortgage Amortization Schedule Work?

Your amortization schedule tells you exactly what you’ll be paying each month for your mortgage including what amount goes towards the principal and interest. 

If you were to look at the mortgage amortization schedule, you’d see the monthly payment date and the total amount of each payment. This would be broken down even further into the amounts going towards the principal and interest. The percentage of each payment that goes towards the interest will decrease as your total loan balance goes down.

Let’s say you take out a fixed-rate mortgage for $200,000 with an interest rate of 6.0% amortized over 30 years. Your monthly mortgage payment would be $1,199 over the length of the loan — or about 360 payments.

With your first mortgage payment, $199 would go towards your principal and $1,000 towards interest. After 15 years, $488 would go towards the principal balance while $710 would go towards interest. Your last payment would be about $1,193 towards the principal and almost $6 towards interest for a total of $200,000 plus around $231,676 in interest.

With an adjustable-rate mortgage, the initial interest rate is fixed for a set period. As the loan matures, the interest rate can change. This means that the amortization schedule for an ARM might be more of an estimate.

You can also use mortgage amortization schedules to calculate how making additional payments can accelerate your amortization. Paying off your mortgage early can save you money over the long run but make sure to check with your lender first. Some lenders may charge a penalty should you decide to pay your mortgage off early.

When you’re ready to apply for a mortgage, find a Total Mortgage loan expert near you.

How To Calculate Mortgage Amortization

Once you know your monthly mortgage payment, you can easily figure out your mortgage amortization schedule. 

Here’s how to calculate mortgage amortization:

For the first month, take the total amount of the loan and multiply it by the annual interest rate. Take that number and divide it by 12 to calculate the amount of interest you’d pay on the first month. If you take that number and subtract it from your monthly payment, then you should have the amount going towards your principal.

For the next month, you can use the same formula but instead, use the remaining principal balance from the first month instead of the original loan amount. You can do this every month until the principal amount reaches $0.

While you can create this on your own in a spreadsheet, there are also numerous mortgage amortization calculators that you can find online that should give you a full schedule. You can also ask your mortgage lender if they can provide a full amortization schedule.

Mortgage Amortization Formula

If you need to calculate your monthly mortgage payment, you can use this part of the mortgage amortization formula: 

M = P[r(1+r)^n/((1+r)^n)-1)]

M = Your monthly mortgage payment

P = The principal loan amount

r =  The monthly interest rate (divide the annual interest rate by 12)

n = The number of payments over the life of the loan

Once you know your monthly mortgage payment, you can calculate your amortization schedule month by month as we did above. 

Take the principal balance of the loan and multiply it by the annual interest rate. Take that number and divide it by 12 to determine the amount of your monthly payment going towards interest. If you take your interest amount and subtract it from your monthly payment, then it should give you the amount going towards your principal. 

A mortgage amortization schedule calculator or even doing this by hand will show you:

Explore Your Loan Options With Total Mortgage

Mortgage amortization is the process of paying down your principal and interest over time through scheduled payments. While it’s possible to figure out your amortization schedule on your own, you can ask your lender or use an online calculator to see your full schedule of payments.

Make sure to compare all of your options before purchasing a home or refinancing. Take the first step by applying for a mortgage or you can find a Total Mortgage branch near you to discuss your options with a Total Mortgage loan advisor.

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