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How Mortgage Amortization Works
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How Mortgage Amortization Works

Harry Jensen, Trusted Mortgage Expert with 45+ Years of Experience
, Trusted Mortgage Expert with 45+ Years of Experience

Mortgage amortization is the technical term for how your loan is paid off over time and determines your monthly payment.  Except for interest only mortgages, all mortgages amortize, which means you pay down your principal loan balance over time and your mortgage is repaid in full with your last payment.  For amortizing mortgages, your payment is split between principal and interest.

The split between the principal and interest payments that make-up your monthly mortgage payment is determined by a mortgage amortization formula. The principal component of your mortgage payment goes to paying down your loan balance. The interest component of your payment is the fee you pay to your lender for borrowing money. The interest component of your monthly payment does not reduce your loan balance. So if you have a $2,000 mortgage payment, not all of your payment reduces your loan balance.

You pay a monthly mortgage payment, based on the amortization formula, that pays down the mortgage balance completely and pays the lender the required amount of interest they are due, over the life of your loan.  Even though your monthly mortgage payment may not change over the course of your loan, the split between principal and interest changes a little bit every month.  For example, with a $2,000 fixed rate mortgage payment, the split may be $1,800 in principal and $200 in interest one month and the $1,700 in principal and $300 in interest the next month -- but your loan payment remains the same.  In short, calculating one, fixed loan payment that both pays down your mortgage and pays the lender interest while changing the split between principal and interest gradually with each payment is how mortgage amortization works.

According to the mortgage amortization formula, at the beginning of your loan, most of your monthly payment goes to paying interest.  This makes sense because at the start of your mortgage, your loan balance is the highest so you owe the most interest to the lender.  At the end of your mortgage, most of your monthly payment goes to paying principal. This also makes sense because as you pay down your mortgage, the amount of interest you owe slowly declines with each payment.

For example, with a fixed rate mortgage approximately 30% of your loan payments in the first year go toward principal while in year 30 almost 90% of your payments go toward principal. A fixed rate mortgage has a constant payment over the life of the loan, but the principal component represents less than half of the monthly mortgage payment for the majority of the mortgage. For a 30 year fixed rate loan, it takes approximately nineteen to twenty three years to pay down half of the loan, depending on your mortgage rate -- the lower the mortgage rate, the faster the principal reduction.  Regardless of your interest rate, you spend two thirds to over three quarters of your loan paying off half of your mortgage balance for a 30 year loan 

Understanding how amortization works is key to knowing how much of your mortgage you have paid off and how much equity you have in your home at any given point over the life of your loan.  Given the mechanics of mortgage amortization, people who are thinking about refinancing or taking cash out of their property early on in their loan may be surprised by how little equity they have in their home. 

Mortgage amortization also impacts your mortgage tax deduction because your interest expense declines over the course of your loan, which means your tax benefit also diminishes as you pay down your loan. Remember, the mortgage tax deduction benefit only applies to interest and not principal payments. So at the end of your mortgage, your tax benefit is significantly reduced.

Example of How Mortgage Amortization Works

The chart below provides a detailed example of mortgage amortization for a $380,000, 30 year fixed rate mortgage with a 4.000% interest rate.  The chart shows the total principal payments (dark blue bar) and interest payments (light blue bar) for each year as well as the mortgage balance at the end of each year (green diamond). Hover your cursor over the bars in the chart to magnify the figures for that year.

This example illustrates how at the start of your mortgage, the majority of your monthly payment goes to pay interest while at the end of your mortgage, the majority of your payment goes to pay down principal. The chart also demonstrates how the principal balance of your mortgage declines to zero over the term of the mortgage even though your monthly mortgage payment never changes.

While this example shows a 30 year mortgage, the mechanics of mortgage amortization work the same for loans of all lengths. For loans with shorter terms such as a 10 or 15 year mortgage, you pay down your principal balance much faster because the loan is shorter. This also reduces your total interest expense over the life of your mortgage. What does not change, however, is that your monthly payment is still the same over the life of the loan and comprised of both principal and interest.  The split between principal and interest changes little by little with every payment as and ultimately results in a loan balance of zero because that is the way amortization works, regardless of your mortgage rate or length.

PrincipalInterestMortgage Balance
  • $373,308Year 1

    15,078

    6,692
  • $366,344Year 2

    14,805

    6,964
  • $359,096Year 3

    14,521

    7,248
  • $351,553Year 4

    14,226

    7,543
  • $343,702Year 5

    13,919

    7,851
  • $335,532Year 6

    13,599

    8,170
  • $327,029Year 7

    13,266

    8,503
  • $318,179Year 8

    12,919

    8,850
  • $308,969Year 9

    12,559

    9,210
  • $299,383Year 10

    12,184

    9,586
  • $289,407Year 11

    11,793

    9,976
  • $279,024Year 12

    11,387

    10,383
  • $268,218Year 13

    10,964

    10,806
  • $256,972Year 14

    10,523

    11,246
  • $245,268Year 15

    10,065

    11,704
  • $233,087Year 16

    9,588

    12,181
  • $220,410Year 17

    9,092

    12,677
  • $207,216Year 18

    8,576

    13,194
  • $193,485Year 19

    8,038

    13,731
  • $179,194Year 20

    7,479

    14,291
  • $164,321Year 21

    6,896

    14,873
  • $148,842Year 22

    6,290

    15,479
  • $132,732Year 23

    5,660

    16,110
  • $115,966Year 24

    5,003

    16,766
  • $98,517Year 25

    4,320

    17,449
  • $80,357Year 26

    3,609

    18,160
  • $61,457Year 27

    2,869

    18,900
  • $41,787Year 28

    2,099

    19,670
  • $21,316Year 29

    1,298

    20,471
  • $0Year 30

    454

    21,316

Watch our video tutorial to learn more about how mortgage amortization works

FREEandCLEAR Mortgage Instructional Video

How Mortgage Amortization Works Instructional Video

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Data provided by Brown Bag Marketing, Inc. Payments do not include amounts for taxes and insurance premiums. Read through our lender table disclaimer for more on rates and product details.

Sources

"Understanding Amortization."  My Home by Freddie Mac.  Freddie Mac, 2019.  Web.

About the author

Harry Jensen, Mortgage Expert

Harry is the co-founder of FREEandCLEAR. He is a mortgage expert with over 45 years of industry experience. Over his career, Harry has closed thousands of loans for satisfied borrowers and now offers his advice and insights on FREEandCLEAR.  Harry is a licensed mortgage professional (NMLS #236752). More about Harry

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