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Mortgage amortization 101 for first-time homebuyers

At the beginning, most of your mortgage payment goes toward interest. Later, most will go to principal. That’s amortization at work

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Mortgage amortization describes where your monthly mortgage payment goes. To start, you pay mostly interest. Over time, you pay more principal.  (Shutterstock)

When you take out a fixed-rate mortgage, you know that your monthly payments will remain the same for as long as you have the loan. But as a first-time homebuyer, you might not know that what those payments go toward changes over time. 

At the beginning of your home loan, most of your monthly payment goes toward paying interest. Eventually, you start paying more and more of the principal. 

This is called mortgage amortization, and it’s an important concept to know if your goal is to be debt-free. Here’s how mortgage amortization works and how you can use this knowledge to your advantage.

Credible helps you compare mortgage rates from multiple lenders.

What is mortgage amortization?

Mortgage amortization is the process of paying down your mortgage. When you first take out a mortgage, you’re given a set monthly payment. Part of this payment goes toward paying the interest, or the money you pay your mortgage lender in exchange for giving you the loan. Another part of the payment goes to the principal, or the amount you actually borrowed. In most cases, part of your monthly payment also goes toward things like property taxes and insurance.

At the beginning of your loan term, most of your payment will go toward the interest on the loan. That’s because your loan balance is still high, so you owe a lot of interest. Only a small amount goes toward the principal. 

But this gradually shifts the longer you have the loan. As you pay down your principal, the amount of interest you must pay goes down as well. By the end of your term, you’ll mostly be paying principal, with only a small amount going to interest.

What is a mortgage amortization schedule?

A mortgage amortization schedule is a chart or table that shows you how your payment changes over time. For each month of your loan term, you’ll see an entry that shows you how much of your mortgage payment will go to principal and how much will go to interest. 

For a $200,000 loan paid over 30 years at a 6% interest rate, your mortgage amortization schedule may follow this type of pattern:

Month 1 (first month)

  • Payment: $1,199.10
  • Principal: $199.10
  • Interest: $1,000
  • Ending balance: $199,801

Month 3 (third month)

  • Payment: $1,199.10
  • Principal: $201.10
  • Interest: $998
  • Ending balance: $199,400

Month 360 (final month)

  • Payment: $1,199.10
  • Principal: $1,193.13
  • Interest: $5.97
  • Ending balance: $0

When you close on your mortgage, you’ll likely receive a mortgage amortization schedule to review. That’s to make sure you understand how paying down your mortgage works.

HOW MUCH DOES A $200,000 MORTGAGE COST?

How do you calculate mortgage amortization?

Mortgage amortization is calculated using a fairly complicated formula that takes into account your loan balance, the length of the loan term, and your interest rate. 

Luckily, you don’t have to do the math yourself. Plenty of mortgage amortization calculators are available online that you can use to determine the breakdown of your payments. You can try this one from Freddie Mac to get you started.

With Credible, you can compare rates, research how much home you can afford, and generate a streamlined pre-approval letter in minutes.

What are the advantages and disadvantages of amortization?

Mortgage amortization has both upsides and downsides.

Pros

  • Your loan is fully paid off with equal payments. With a fully amortized fixed-rate mortgage loan, you completely pay off your mortgage at the end of the term by making the same exact payment each month.
  • You know all the details of your payments in advance. Mortgage amortization is just plain math. Using an amortization calculator, you can understand exactly how your payment will break down before you close on your loan.
  • Your payments don’t change. Traditional mortgage amortization allows you to keep the same monthly payment, making it an easy expense to budget for.

Cons

  • You build equity slowly. At the beginning of your loan, you’re paying very little principal. This means that you’re only slowly building equity in your home.
  • It can be difficult to understand. While amortization is math, it’s complicated math. Doing the calculations yourself is out of reach for most people.
  • You pay a lot of interest. Over the course of a 30-year mortgage, you may pay hundreds of thousands of dollars in interest. Your interest payments at the beginning of the mortgage are particularly high because of the large remaining balance.

WHAT CREDIT SCORE DO YOU NEED FOR A MORTGAGE?

Should you pay off your mortgage faster?

If you can afford to pay off your mortgage faster, it’s often a great idea. The more quickly you can pay down your loan, the less in interest you’ll ultimately pay. Consider a few of these strategies to save money and get out of debt faster:

  • Make extra payments. When you make extra payments toward your loan, the additional amount is typically applied directly to the principal balance. This reduces the amount you’ll pay in overall interest, often by a significant amount. You may be able to shave tens of thousands of dollars off your mortgage by making even small extra payments each month or year.
  • Make bi-weekly payments. Instead of making a monthly payment, you may consider paying your mortgage every two weeks instead. This may line up better with your paycheck, and over the course of the year, you’ll have made the equivalent of 13 monthly payments. That additional month can go toward your principal.
  • Refinance to a shorter term. The shorter your mortgage, the less interest you’ll pay in the long run — though your monthly payments will be higher. If your budget allows, consider refinancing a 30-year mortgage to a 15-year or 10-year loan to reduce the amount you’ll ultimately pay. You may also qualify for a lower interest rate.

When you’re ready to apply for a mortgage, you can use Credible to compare rates from multiple lenders.