Understand how mortgage amortization works by observing how the split between principal and interest payments changes and how the principal mortgage balance gets paid down over the term of a mortgage. Although the payment for a fixed rate mortgage never changes, at the beginning of a mortgage the monthly mortgage payment is comprised of mostly interest while at the end of the mortgage term, the payment is comprised of mostly principal
Monthly Housing Payments
- Loan Type
What is Mortgage Amortization?
How Your Mortgage Gets Paid Down
Mortgage amortization is the "mechanism" or formula that determines how your mortgage gets paid off over time. Unless you have any interest only mortgage, when you make a mortgage payment your payment is comprised of principal and interest. The principal component of your mortgage payment goes to paying down your mortgage balance while the interest component of your payment goes to the lender as payment for borrowing the money. Although your monthly payment does not change over the course of your mortgage, the split between principal and interest changes a little every month. An amortization formula determines the split between principal and interest for each payment as well as the monthly payment that allows you to pay off your mortgage balance over the life of your loan. From the borrowers standpoint, you make the same monthly mortgage payment over the course of your mortgage while amortization ensures that your loan is paid in full with your final payment and the lender receives the interest due according to the terms of your loan.
Your Mortgage Payment is Mostly Interest in the Beginning, Principal at the End
In the beginning of your mortgage, your payment is comprised of mostly interest and relatively little principal. The mix between interest and principal changes a little every monthly and your payment is comprised of mostly principal by the end of your mortgage. It is also important to highlight that mortgage amortization does not work "evenly" over the course of your loan. In other words, you have not paid off half of your mortgage at the halfway point of your loan. For example, for a $380,000 30 year fixed rate mortgage with a 4.0% interest rate, your mortgage balance is approximately $245,000 at the end of year fifteen, or the halfway point, which means you have only paid off $135,000 of your mortgage. Using the same example, the loan is not half paid-off until after year nineteen. For a 30 year fixed rate mortgage, it takes approximately nineteen to twenty three years to pay-off half the loan amount, depending on your interest rate.
Amortization Works Differently for Different Types of Mortgages
Amortization for a fixed rate mortgage works differently than for an adjustable rate mortgage (ARM). With a fixed rate mortgage, the mortgage term used to determine the mortgage amortization schedule does not change over the life of the loan. For example, the monthly mortgage payment for a 30 year fixed rate mortgage is always based on a 30 year mortgage term. With an adjustable rate mortgage, the mortgage balance re-amortizes over the remainder of the mortgage term every time the interest rate adjusts. For example, at the end of year 18 of an ARM, the monthly payment is based on the current loan balance, new interest rate and a twelve year loan term (because the mortgage has twelve years remaining). While amortization is relatively straightforward for a fixed rate mortgage, borrowers should understand how it can impact the monthly payment for an ARM over the life of the loan.
More FREEandCLEAR Mortgage Resources
Understand how mortgage amortization works and how the split between principal and interest that comprises your monthly payment changes over the course of your mortgage
Understand how the length of your mortgage affects your monthly payment and total interest expense over the life of your loan
Compare mortgage rates and fees for top lenders near you. Comparing multiple mortgage proposals is the best way to find the mortgage with the lowest rates and fees
Got mortgage questions? We love answering them. Submit your mortgage questions and receive an informative response within 24 hours