U.S. Markets closed

What's mortgage amortization, and how does it determine your monthly payment?

Shane Murphy
What's mortgage amortization, and how does it determine your monthly payment?

Mortgage amortization is a fancy term for a rather straightforward concept: the process of paying off your mortgage loan in equal installments each month.

It's something you should understand if you're among the millions who are buying houses or refinancing their existing home loans to capitalize on today's lowest-ever mortgage rates.

When you take out a new fixed-rate home loan, you can feel confident that your monthly payment will stay steady for the life of your loan. If it's a 30-year loan and you live there for the long haul, you'll pay the same amount every month for all three decades.

But the portion that goes to your principal — the amount of the actual mortgage that you're paying back — and the share that goes to interest will change from month to month.

Here’s everything you need to know about mortgage amortization, including how a typical amortization schedule is laid out, how to calculate amortization, and how it affects the makeup of each mortgage payment.

What an amortization schedule looks like

thodonal88 / Shutterstock

When you first take out a mortgage, the majority of each monthly payment will go toward interest. Later, as you near the end of your mortgage term, most of your payment will go toward reducing your principal debt.

The amortization tables below give tastes of how your amortization schedule would look if you took out a $100,000 mortgage with an interest rate of 4%, amortized over a period of 30 years. (You could do much better than the 4% interest in our scenario by comparing loans and shopping around for the lowest mortgage rate you can get).

You can see how the interest/principal mix is much different during the first year than during the 30th year:

First-year amortization schedule for $100K, 30-year mortgage at 4%

Month 1

  • Payment amount: $477.42
  • Interest: $333.33
  • Principal: $144.09
  • Remaining balance: $99,855.91

Month 2

  • Payment amount: $477.42
  • Interest: $332.85
  • Principal: $144.57
  • Remaining balance: $99,711.34

Month 3

  • Payment amount: $477.42
  • Interest: $332.37
  • Principal: $145.05
  • Remaining balance: $99,566.29

Month 4

  • Payment amount: $477.42
  • Interest: $331.89
  • Principal: $145.53
  • Remaining balance: $99,420.76

Month 5

  • Payment amount: $477.42
  • Interest: $331.40
  • Principal: $146.02
  • Remaining balance: $99,274.74

Month 6

  • Payment amount: $477.42
  • Interest: $330.92
  • Principal: $146.50
  • Remaining balance: $99,128.24

Month 7

  • Payment amount: $477.42
  • Interest: $330.43
  • Principal: $146.99
  • Remaining balance: $98,981.25

Month 8

  • Payment amount: $477.42
  • Interest: $329.94
  • Principal: $147.48
  • Remaining balance: $98,833.77

Month 9

  • Payment amount: $477.42
  • Interest: $329.45
  • Principal: $147.97
  • Remaining balance: $98,685.80

Month 10

  • Payment amount: $477.42
  • Interest: $328.95
  • Principal: $148.47
  • Remaining balance: $98,537.33

Month 11

  • Payment amount: $477.42
  • Interest: $328.46
  • Principal: $148.96
  • Remaining balance: $98,388.37

Month 12

  • Payment amount: $477.42
  • Interest: $327.96
  • Principal: $149.46
  • Remaining balance: $98,238.91

And here's a look at how your monthly payment dollars are distributed during the last year of the mortgage:

Final-year amortization schedule for $100K, 30-year mortgage at 4%

Month 349

  • Payment amount: $477.42
  • Interest: $18.68
  • Principal: $458.74
  • Remaining balance: $5,144.96

Month 350

  • Payment amount: $477.42
  • Interest: $17.15
  • Principal: $460.27
  • Remaining balance: $4,684.69

Month 351

  • Payment amount: $477.42
  • Interest: $15.62
  • Principal: $461.80
  • Remaining balance: $4,222.89

Month 352

  • Payment amount: $477.42
  • Interest: $14.08
  • Principal: $463.34
  • Remaining balance: $3,759.55

Month 353

  • Payment amount: $477.42
  • Interest: $12.53
  • Principal: $464.89
  • Remaining balance: $3,294.66

Month 354

  • Payment amount: $477.42
  • Interest: $10.98
  • Principal: $466.44
  • Remaining balance: $2,828.22

Month 355

  • Payment amount: $477.42
  • Interest: $9.43
  • Principal: $467.99
  • Remaining balance: $2,360.23

Month 356

  • Payment amount: $477.42
  • Interest: $7.87
  • Principal: $469.55
  • Remaining balance: $1,890.68

Month 357

  • Payment amount: $477.42
  • Interest: $6.30
  • Principal: $471.12
  • Remaining balance: $1,419.56

Month 358

  • Payment amount: $477.42
  • Interest: $4.73
  • Principal: $472.69
  • Remaining balance: $946.87

Month 359

  • Payment amount: $477.42
  • Interest: $3.16
  • Principal: $474.26
  • Remaining balance: $472.61

Month 360

  • Payment amount: $477.42
  • Interest: $1.58
  • Principal: $475.84
  • Remaining balance: $0.00

As you can see, your monthly payment, including both interest and principal, will always total around $477.

With your first payment, $333 goes to interest and $144 goes to principal. With your final payment, less than $2 goes toward interest and about $476 is devoted to principal.

A strong credit score will help you score something lower than the 4% mortgage rate in our example, so check your score for free to make sure it's where it needs to be.

How do you calculate amortization?

Syda Productions / Shutterstock

Your amortized monthly payment is based on the size of your loan, your interest rate, and the length of your mortgage term.

You can calculate the payment on your own, but we have to warn you: There is math involved — and it's complicated math.

First, determine your monthly interest rate by taking your annual rate and dividing by 12. We'll call the result "R."

Add 1 to R, then raise that sum to the power of N, where N stands for the total number of monthly payments. (For a 30-year mortgage, N would equal 360.)

Take the product of that equation and multiply by R — then multiple that amount by your loan principal, or "P."

Let's call your result "X."

Still following? We warned you it was complicated. Next you add 1 plus R again, raise it to the power of N once more — and this time take the product of the equation and subtract 1. We'll call this result "Y."

Divide X by Y and you'll have your monthly payment. See how, er, easy it is? If by this point you're feeling a panic attack coming on as you flash back to high school algebra, don't worry. There’s a much easier way to figure out amortization: An online mortgage payoff calculator will generate an amortization table for you.

Benefits of understanding amortization

Minerva Studio / Shutterstock

When you look at amortization numbers, you can compare the total cost of borrowing for different mortgage terms — a 30-year mortgage versus a 15-year fixed-rate mortgage, for example.

And, if you've been burdened with pesky private mortgage insurance, amotizaztion will show the point where your equity in the home will reach 20% of the house's value. Once you get there, you can cancel PMI — and reduce your monthly payment.

Plus, you can see how much you could save on interest by making additional principal payments: adding a little extra to every monthly payment to shave years off your mortgage term and pay off your loan faster.

For example, if you boosted your monthly payments by $200 on a $100,000, 30-year fixed-rate mortgage at 4% interest, you'd pay off your loan 13 years sooner than if you were to stick with the standard payment plan.

How does mortgage amortization help you?

Amortization provides a schedule for paying off your mortgage and interest over a predetermined amount of time.

Your loan balance will decrease gradually and you’ll build equity slowly as you make your payments, though your equity will gain momentum as you near the end of your loan period.

You can keep your monthly payments down by comparison shopping for your loan and making sure you lock in the best interest rate that's available to you.