Ever wonder how your mortgage goes from a pain in your neck to free and clear?

Well, it all has to do with a little thing called “amortization,” which is defined as the reduction of debt by regular payments of interest and principal sufficient to pay off a loan by maturity.

In simple terms, it’s the way your mortgage payments are distributed on a monthly basis, detailing how much interest and principal will be paid off each month for the duration of the loan term.

Understanding the way your mortgage amortizes is a great way to understand how different loan programs work. And an amortization calculator will show you how your balance is paid off on a monthly or yearly basis. It will also detail how much interest you’ll pay over the life of your loan, assuming you hold it to maturity.

### Early Payments Go Toward Interest

(pictured above is an actual “amortization schedule” from an active mortgage about five months into a 30-year mortgage)

During the first half of a 30-year fixed-rate loan, most of the monthly payment goes to paying down interest, with very little principal actually paid off. Towards the last 15 years of the loan you will begin to pay off a greater amount of principal, until the monthly payment is largely principal, and very little interest.

This is important to note because homeowners that continuously refinance will find themselves back in the interest-paying portion of the loan every time they start anew, meaning they’ll pay a lot more interest over the years. Each time you refinance, assuming you refinance into the same type of loan, you’re essentially extending the amortization period of the mortgage. And the longer the term, the more you’ll pay in interest.

Tip: If you have already paid down your mortgage for several years, but want to refinance to take advantage of low mortgage rates, consider refinancing to a shorter-term mortgage. This is one simple way to avoid “resetting the clock.”

### Let’s look at a mortgage amortization example:

Loan amount: $100,000

Interest rate: 6.5%

Monthly mortgage payment: $632.07

Say you’ve got a $100,000 loan at 6.5% on a 30-year fixed payment. The monthly principal and interest payment is $632.07. If you break down the very first monthly mortgage payment, $541.67 goes toward interest and $90.40 goes toward principal. The total debt is reduced by $90.40, so next month you’ll only owe interest on $99,909.60.

So when it comes time to make your second monthly mortgage payment, interest is calculated on the new, lower balance. The payment would be the same, but $541.18 would go toward interest and $90.89 would go to principal. This interest reduction would continue until your monthly mortgage payments were going primarily to principal.

In fact, the 360th payment in our example contributes just $3.41 to interest and a whopping $628.66 to principal.

### Consider Larger Mortgage Payments to Shorten Amortization Period

Okay, so now you have a better idea of how your mortgage amortizes. Your next move will be to determine if paying your mortgage down faster is a good idea.

In the example above, you’ll pay a total of $227,545.20 over the 30-year term, with $127,545.20 going toward interest.

If you make slightly larger payments, say $700 each month instead (consistently), your mortgage term will be cut by roughly seven years and you’ll only pay $76,448.10 in interest. That will save you about $50,000 over the life of the loan…not bad.

Take the time to look into biweekly mortgage payments as well. These are mortgage payments made every two weeks, which equates to 26 total payments a year, or 13 monthly mortgage payments. That extra month payment per year goes toward principal, lowering the total amount of interest paid and decreasing the term of the loan.

Every potential homeowner should take a look at an amortization schedule or a mortgage calculator to determine exactly how mortgage payments apply in their particular situation. Simply knowing your interest rate is not enough to make an educated decision on a loan product.

And be sure you understand negative amortization as well, assuming if you got involved with a pesky option-arm loan.

Read more: 30-year vs. 15-year mortgages.

RosalieJuly 15, 2013 at 11:13 am -I don’t think people understand how important the amortization period is. They only seem to focus on monthly payments. But the interest savings on a 15-year mortgage are huge, assuming you can handle the extra cost each month.

Colin RobertsonJuly 15, 2013 at 1:02 pm -That’s true; most lenders just advertise the monthly payment amount, seeing that it’s what most borrowers focus on. And it’s true that a shorter-term loan will result in a lot less interest paid, but also consider most homeowners move in less than 10 years. And some invest their money elsewhere for larger returns. So the proposed amortization period doesn’t always come into play as scheduled.

EllaJuly 16, 2013 at 9:38 pm -This is exactly why you should go with a 15-year fixed. You will pay A LOT less in interest over half the amount of time. Use an amortization schedule and you’ll see the many tens of thousands you will save.

PatriciaJuly 18, 2013 at 9:31 am -Most homeowners don’t know (or seem to care about) how a mortgage is actually paid off. They just look at the monthly payment and nothing else, thanks to the banks. It’s a shame because it could mean the difference of thousands of dollars.

ThomasAugust 20, 2013 at 8:53 am -This is what they mean by resetting the clock if you refinance before your mortgage term is over. You essentially restart the amortization period, and again start paying nearly all interest in your early payments. So those that refinance should always consider shorter terms to avoid extra interest costs.

Jack R.December 12, 2013 at 6:19 am -I know exactly how my mortgage is paid off, which is why I went with a 10-year fixed. I’ll save more than $100,000 in interest compared to a 30-year fixed and own my home 20 years sooner. Policymakers in Washington should abolish the 30-year fixed now! It’s a ripoff!

Colin RobertsonDecember 12, 2013 at 7:06 am -Yep…I wrote about that specific topic as well here:

http://www.thetruthaboutmortgage.com/resetting-the-clock-when-refinancing-your-mortgage/

Quentin K.January 18, 2014 at 11:38 pm -If I make an extra mortgage payment, will that be reflected in the monthly payment of the amortization schedule? Or does it just reduce interest over the life of the loan?

Colin RobertsonJanuary 20, 2014 at 11:12 am -If you were to make an extra payment, subsequent monthly payments would still be the same amount, but the interest portion of the payment would go down and the principal portion would go up. As a result, the term of your mortgage would be reduced.

Margie B.July 31, 2014 at 5:31 pm -My husband would like to retire in 4 years when he’s 55, just in case his company lays him off, as it is happening to others there when they reach that age. We are 3 years into a 15 year loan at 3.125%. I’ve been putting extra (same amount as our mortgage amount) towards the principal each month.

Question: Would it be more beneficial to put that amount each month towards the principal,or as an extra mortgage payment? Using amortization tables online, I’m seeing that we can pay off our home in 4 years by putting the extra towards the principal.

What are your thoughts?

Sincerely,

Margie Bayer

Auburn, WA

Colin RobertsonAugust 1, 2014 at 9:51 am -Margie,

It sounds like you’re talking about two things that are essentially the same. Generally, any excess amount over your mortgage payment due each month goes toward the principal balance. Sometimes you have to indicate that the extra amount should go toward principal as opposed to say escrow. Either way, the quicker you apply extra (or larger) payments, the more beneficial it is. In other words, if you started making double payments the first month your mortgage was due, you’d save more (on interest) than if you didn’t start making double payments until say month 13 because each month a smaller balance would equate to less interest due the following month.

SteveAugust 2, 2014 at 6:33 pm -Exactly, we are just now finding out that 16 years in, even when we double payments we missed the bigger boat during the first 15 years. We are aiming to get it fully paid in the next 3 years, but we already paid the majority of interest so the only good thing is time. Our next mortgage will be paid majority first 15 years instead to kill that extra interest.

Nice blog appreciate it.

LindaSeptember 12, 2014 at 3:14 pm -We have heard that if we make an extra mortagage payment on the principle the first year of the loan and then two extra payments the second year, we would cut our mortgage from 30 to 15 years. Is that correct?

Colin RobertsonSeptember 12, 2014 at 6:45 pm -Hmm…even if you made one extra payment annually each and every year it would only reduce a 30-year term by a little over four years. Two extra payments annually would shorten the term a bit more, but not cut it in half. Furthermore, the earlier you make extra payments, the more you save. So waiting to make extra payments doesn’t really make sense. Let me know if you have more details on this payment structure.

MarkSeptember 19, 2014 at 11:02 pm -If you pay off a 30 year mortgage in five years, is the cost the same as paying off a 5 year mortgage in five years? Assume the same interest rate for both mortgages and assume extra monthly payments on the 30 year mortgage to match the payments on the 5 year mortgage. If the cost is the same, what’s the benefit of getting a five year mortgage vs. a 30 year mortgage paid off in five years?

Colin RobertsonSeptember 20, 2014 at 9:28 am -Mark,

It shouldn’t cost the same…the interest rate on a 5/1 ARM should be around 1% lower than a 30-year fixed, so if you really planned to pay it off in five years, you could go with the ARM and save money on interest. But you’d have to make extra payments to principal each month because the ARM still amortizes over 30 years. So it requires a bit more work to pay it off on schedule.

Mike DillonSeptember 27, 2014 at 8:30 am -Colin, my wife and I are gathering info to send to lender for refi of our 30yr into a 15 yr – we are exactly 1yr into the 30 yr. I’d like to find an amortization schedule that will let me enter a fixed monthly additional princ payment starting now (2nd yr in) so I can compare to the refi. I want to do this to determine if I should do refi or just increase monthly payment on my own. The calculator on bankrate won’t let me “jump in” other than at the beginning. We currently have 4.25% and would be getting 3.3% on 15yr.

Thanks,

Mike

Colin RobertsonSeptember 27, 2014 at 12:55 pm -Mike,

Just do a search for an early mortgage payoff calculator and you’ll be able to find one that lets you add a set amount each month to see the amortization schedule. You’ll likely find that you’ll need to pay quite a bit more each month to match the 15-year with a 1% lower rate.

KellyOctober 14, 2014 at 10:22 am -We are getting a $206,000, 15 year loan, with 10% down. We have not sold our current home yet, so when we do we will have approx. $30,000…Do we refinance or pay the lump on the current mortgage, which will benefit us the most?

Colin RobertsonOctober 14, 2014 at 12:16 pm -Kelly,

If you’re only putting 10% down, I’m assuming you have to pay mortgage insurance (or take a slightly higher rate). You’ll have to do the math but a refi could mean you can wipe out the mortgage insurance if you apply the $30k to the balance and pay it down below 80% LTV.

However, if you keep the original loan and apply $30k to the balance, less interest would be paid and the loan would be paid off in less than 15 years. Alternatively, if you refinance with a smaller balance it would take the full 15 years to pay off the loan and result in more interest, but your monthly payment would be smaller because the loan size would be closer to $176k.

LarryOctober 15, 2014 at 8:25 am -Great suggestions! I’ve been paying an extra $250/month on my 30 year mortgage. I’ll check out the “early mortgage payoff calculator. Thanks.

JoeDecember 1, 2014 at 9:48 pm -What’s the difference between having a 30yr mortgage and paying it off early in only 20 yrs versus having a 20 yr mortgage and paying it off at the end, aka 20 yrs?

cause if you end up spending the same amount of money, then I rather go with a 30yr mortgage and pay extra each month, BUT if $hit hits the fan and i need that extra money for a few month, I can revert back to paying the minimum due which would be much lower on a 30 yr vs. 20 yr plan.

Am I missing something?

Colin RobertsonDecember 2, 2014 at 9:53 am -Joe,

The interest rate could be slightly lower on the 20-year fixed, which would make it cheaper unless you make even larger extra payments on the 30-year fixed. Additionally, it requires no work on your behalf to make the larger payments tied to the 20-year fixed. On the other hand, you need to be disciplined to make extra payments on a 30-year fixed. Many people lack discipline…but yes, it gives you an out during tough times.

IanDecember 26, 2014 at 5:55 pm -I have a fixed rate mortgage. I have not missed payments or been late. The bank statement says I paid more interest this year than last year. How is this possible?

AsimDecember 29, 2014 at 11:58 am -Question: I have 30 year amortization left on my mortgage – I am paying double my mortgage each month(weekly payments) – so my amortization showing 10 years left , that it will be paid off in 10 years if i keep paying double mortgage.

My Question is, i am due for renewal in 2016, Should i decrease the amortization to lets say 10 years – so then what i am paying now becomes my normal payment. Which pay i will be paying more towards principle, and less interest? ? or it doesn’t matter, if i pay double, with 30 year amortization, or normal with 10 year amortization,

(reason i am thinking decreasing amortization is because it would give me option to pay it even sooner, as currently i am paying the maximum allowed).

Any input is appreciated.

AsimDecember 29, 2014 at 12:11 pm -To be Exact, $140,000 mortgage, $160 weekly payment , but i pay $360 weekly – which include taxes (yearly$2000) –

by doing this my bank showing that i will pay off mortgage in 10 years, 14 weeks, (original amortization showing 35 years).

so when i renew it in jan 2016 – should i decrease the amotriazaion period to lets say 15 years, ,, or what i am doing now is better, as what i am paying extra should be going towards principle. ?

Colin RobertsonDecember 29, 2014 at 12:30 pm -Asim,

If you are truly capped on what you can pay and want to pay more, refinancing to a 10-year loan might make sense. But you’ll have to deal with closing costs. Though you might be able to get a lower interest rate on a 10-year loan to offset those costs and then some. Also keep in mind that a 10-year loan means you MUST make larger payments…it’s no longer optional as it is now with your 30-year loan. Do the math and consider your goals and what you’re comfortable with to make a decision.

Colin RobertsonDecember 29, 2014 at 8:34 pm -Ian,

It might be that you made an extra monthly payment this year as opposed to last. Check out this post:

http://www.thetruthaboutmortgage.com/boost-your-tax-deduction-by-making-your-january-mortgage-payment-this-year/

ElaineJanuary 14, 2015 at 8:10 am -Question for Colin:

I’m in the process of payment of student debt. If I make a significant initial payment (70K of a 100K loan) will it reduce my subsequent monthly payment minimums? Or does it depend on the repayment plan? I’m presently doing an “Income-Driven Plan,” but my goal is to have the loan paid off ASAP without being completely broke in the interim.

Thanks so much.

Elaine

Colin RobertsonJanuary 14, 2015 at 10:17 am -Hey Elaine,

I’m not sure if student debt reamortizes. Mortgages don’t, so if you paid down a mortgage similarly, you’d still owe the same monthly payment as the month before, but you’d pay off your mortgage much faster. You’ll need to contact your servicer to see how they handle it. Ask about recasting.

TiffyJanuary 24, 2015 at 5:03 pm -Hi Colin,

I’m debating on whether or not I should refinance my mortgage loan to a 15 year loan from a 30 year or keep adding balloon payments. This would be my 2nd refinancing as I refinanced 2 1/2 years ago to another 30 year (not wise on my part so I’ve learned). First mortgage was in 2007 for $200,000 30 yr/6.125%, kept it for 5 years then refinanced in June 2012 at $170,000 for another 30 yr/ 3.875% (had to throw extra money to avoid PMI). Have been adding extra payments for the past 2 1/2 years and am now down to $138,800. I don’t know if I should continue to paying extra toward principal or refinance a smaller balance, am thinking of $125,000 for 15 yr/2.875%. Since my first loan, I’ve already paid $77K in INT. I did not realize that it was better to pay extra much earlier in the loan than later. Any advise would be greatly appreciated. Thank you!

Colin RobertsonJanuary 26, 2015 at 11:00 am -Hey Tiffy,

If your goal is to pay down the mortgage as quickly as possible and you have the money and don’t plan to invest it elsewhere for a better return, a 15-year mortgage could make sense. The obvious advantage is a lower mortgage rate, the downside is you must make the larger payments each month, it’s no longer optional as it is with the extra payments you’ve been making. Also consider the cost of any refinance in your calculations.

CherylJanuary 28, 2015 at 6:21 am -Hi Colin,

I’m 12 yrs into a 30yr loan at 5.75%. Due to where I am on the amortization schedule, it seems not to make sense to refi – even in to a 15yr at around 4% (this in an investment property). Are years in to the amortization a consideration for a refi?

Colin RobertsonJanuary 28, 2015 at 10:38 am -Cheryl,

Yes, years remaining on the loan matters for sure, but if you can drop your rate nearly 2% and go with a relatively similar term, the savings should be pretty substantial. And you could look into a 10-year fixed to save even more, assuming you want to pay faster and can handle the payments. Or you could pay extra on a 15-year fixed to amortize it faster. Do the math with an amortization calculator and you’ll be able to see what I’m talking about.