Mortgage Amortization

mortgage amortization

Ever wonder how your home loan goes from a pain in your neck to real estate free and clear?

Well, it all has to do with a magical little thing called “mortgage 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, dictating 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 show you how much interest you’ll pay over the life of your loan, assuming you hold it to maturity.

Trust me, you’ll be surprised at how much of your payment goes toward interest as opposed to the principal balance. Of course, there’s not much you can do about it if you don’t buy your home in cash, or choose a shorter loan term, such as the 15-year fixed mortgage.

Early Payments Go Toward Interest

loan amortization schedule

Pictured above is an actual “amortization schedule” from an active mortgage about five months into a 30-year fixed-rate mortgage. That means it’s got another 355 months to go!

Your mortgage lender or loan servicer may provide an amortization schedule calculator that you can use to see how your loan will be paid off. It can be helpful to make decisions about your mortgage going forward.

As you can see, the payment is $1611.64 per month. It doesn’t change because the loan is fixed, but the ratio of interest to principal does.

Early on, more than $1,000 of that $1,611.64 is going toward interest each month, with just over $500 going toward the principal balance. You want those principal payments to go up because they actually pay down your loan balance. The rest just makes your lender (and loan servicer) rich.

The good news is as you pay down your mortgage, the total amount of interest due will decrease with each payment because it’s computed based on the remaining balance, which goes down as principal is paid back.

And as that happens, the amount of principal rises because a fixed mortgage has a fixed payment too. So it’s a win win. Sadly, it doesn’t happen all that quickly.

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. Toward 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 who continuously refinance their mortgages 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 loan amortization period of the mortgage. And the longer the term, the more you’ll pay in interest. If you don’t believe me, grab a mortgage amortization calculator and you’ll see.

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, such as a 15-year or 10-year fixed mortgage. This is one simple way to avoid “resetting the clock” and stay on track if your goal is to pay off your mortgage.

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 amount set at 6.5% on a 30-year fixed mortgage. The total principal and interest payment is $632.07 per month.

If you break down the very first monthly mortgage payment, $541.67 goes toward interest and $90.40 goes toward principal. The outstanding balance is reduced by $90.40, so next month you’ll only owe interest on $99,909.60.

When it comes time to make your second monthly mortgage payment, interest is calculated on the new, lower balance. The payment would remain the same, but $541.18 would go toward interest and $90.89 would go to principal. This interest reduction would continue until your monthly 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. A payoff calculator will illustrate this.

Consider Larger Mortgage Payments to Shorten Amortization Period

Okay, so now you have a better idea of how your mortgage amortizes or gets paid off. 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. Ouch!

If you make slightly larger payments, say $700 each month instead (consistently), your mortgage term will be cut by roughly seven years (23 years total) 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.

If saving money is your goal, you can also make an extra payment here and there if you so choose, which can make a major dent in your loan balance. It’s actually pretty incredible how far a little extra goes in the mortgage world.

Conversely, you might be happy as a clam to pay your mortgage down slowly, seeing that mortgage rates are so low relative to other types of loans and/or investment options.

For example, if you can pay a rate of 4% on your home loan for 30 years and get a double-digit return in the stock market, what’s the rush? This is why some home buyers opt for adjustable-rate mortgages with no intention of ever paying off their loans, knowing they can do better elsewhere.

How Do I Pay Off My Mortgage in 10 Years?

Now let’s look at some specific ways to greatly speed up the loan amortization process. I’m providing ballpark estimates here, so do your diligence with a mortgage calculator to determine what works for your particular loan amount and mortgage rate. Results may vary.

How to pay off a 30-year mortgage in 15 years:

If you want to cut your mortgage term in half, simply figure out what the 15-year payment would be, then make that payment each month until the mortgage is paid in full. In general, this is about 1.5X the 30-year payment.

For example, a $350,000 mortgage set at 5% would require a monthly payment of $1878.88 in order to be paid off in 30 years. If you made the 15-year payment of $2767.78 instead, the mortgage would be paid off in 180 months, or 15 years.

How to pay off a 30-year mortgage in 10 years:

If you want to pay off the mortgage in just 10 years, the rule of thumb is to double your monthly mortgage payment. It’s not exact, but it’s very close.

Using our example from above, you’d need a monthly payment of $3712.29 to extinguish the loan in 120 months. Those with relatively small loan amounts might have no trouble doing this.

At the same time, it might be a big ask for someone with a jumbo mortgage who is struggling with affordability as it is.

How to pay off a 30-year mortgage in 5 years:

If you’re really impatient and want to pay off the mortgage in five years, you basically have to make anywhere from 3.5-4X the monthly payment. That’s $6,604.93 in our example to pay it all off in 60 months.

How to pay off a 15-year mortgage in 10 years:

If you have a 15-year fixed, but want to pay it down in 10 years, you can generally make a monthly payment about 1.5X and it’ll be paid off in 120 months instead of 180.

How to pay off a 15-year mortgage in 7 years:

To cut your 15-year mortgage term in half (or a bit more), doubling mortgage payments would pretty much lower the term to seven years or less, perhaps closer to 6.5 years.

How to pay off a 15-year mortgage in 5 years:

For those with a 15-year mortgage who want to triple the payoff speed, a monthly payment roughly 2.5X will get the job done.

You can do this same formula for basically any mortgage term and desired payoff duration. So if you have a certain payoff date in mind, figure out the number of months first, then plug in that monthly payment into a loan calculator to get the length of the mortgage down.

I should mention that mortgage rates are lower on shorter-duration home loans, so you may actually save more money by choosing a shorter loan term to begin with. However, you do get the added bonus of flexibility if you have a longer-term mortgage and paying extra is simply voluntary.

This is why a mortgage refinance from a 30-year mortgage to a 15-year fixed mortgage can be so powerful. Not only is the term shorter, but the interest rate is lower too. Sure, the payment amount will rise, but you’ll own your home a lot sooner and pay way less interest.

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

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

You’ll see how much impact even an eighth of a percentage point can make, which illustrates the importance of having an excellent credit score so you can obtain the lowest interest rate possible.

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



145 Comments

  1. Colin Robertson February 13, 2018 at 3:12 pm -

    Sam,

    Your question isn’t totally clear to me, but any basic mortgage calculator will break down the total amount of principal and interest due in each monthly payment. From there, you can decide if you want to pay even more toward your principal balance each month.

  2. Sam February 13, 2018 at 10:47 am -

    How do you break monthly payment into a portion going toward interest and a portion going toward principal.
    Thanks.

  3. Colin Robertson August 16, 2017 at 8:58 am -

    Shawn,

    If you paid the entire principal balance the mortgage would be paid off in full. This is how mortgages wind up getting paid before maturity. If they made you pay all the interest somehow it would defeat the purpose of making early/extra payments. They might be referring to some nominal amount of leftover interest for the last month.

  4. Shawn August 15, 2017 at 8:22 pm -

    Hi Colin,

    I currently have a house loan of $300,000 on a 30-year fixed payment plan.

    Lets say I start making payments (large lump sums or small steady payments) specifically towards to principle (none to interest). If I get to the 10-year mark of my 30-year loan and my all principle is paid off, do I still have to pay the remaining interest associated with my next 20-years worth of payments? In other words do I still have to pay the remaining interest on the loan or do I still have to pay off the entire amount of the loan including principle and interest?

    The reason why I am asking is because I called the company which I make my mortgage payment to and they stated I would have to pay off the remaining amount of interest on the loan in this scenario…. I believe they gave me false information but I wanted to make sure.

  5. Colin Robertson May 20, 2017 at 7:12 am -

    Peach,

    Assuming you’ve never refinanced, and you just made the regular principal and interest payment every month, just plug in the original loan amount and interest rate into an amortization calculator and scroll down to the month you’re currently in to get an idea of what your current balance is. If it has been 20 years, you might be around month 240.

  6. Peach May 19, 2017 at 1:19 pm -

    I have been in my home for 20 yrs. I paid $96000 and my principal payment is $520.00 a month. How much interest am I still paying a month? The rate I am at is 7.5%.
    I don’t even know what I owe on the house, but guessing about $34000… ?

    Okay, my friend just told me that my terminology was wrong on saying ” principal ” payment. The $520.00 a month is is my house payment before all the insurance and other garbage is tacked on. Hope that clarifies my question. Please help

  7. Colin Robertson May 10, 2017 at 2:52 pm -

    Jay,

    Yes, if you have the same balance and make the same monthly payment over the same time period (15 years), the same amount of interest would be paid if the rates were the same. But like you said, you could potentially save with a lower interest rate on a 15-yr or 10-yr. To offset that rate improvement, you’d have to make an even larger payment each month on the 30-yr fixed to extinguish the loan in 180 months. Note that the refinance would also lock you into making that larger payment, whereas the 30-year provides choice each month.

  8. Jay May 9, 2017 at 5:12 pm -

    Hello Colin,
    I am being a bit lazy doing the actual calculation myself. My question is if you were to make monthly payments equivalent to 15 yr fixed even though you have a 30 yr fixed, would the total amount of interest payment be about the same, aside from the difference that comes from the interest rate difference? My interest rate for 30 fixed was 3.875. Upon current rate lookup, 15 fixed is about 3.5 and 10 fixed at 3.25. But with additional fees involved with refinancing, I am not sure if refinancing is still a much better option with lesser cash availability for other savings, eg. second property purchase down payment. I would appreciate your advice. Thanks.

  9. Colin Robertson April 4, 2017 at 11:06 am -

    Jonathan,

    Good point about inflation, though not everyone looks at things that way. There are generally two camps – the people who want to be mortgage-free ASAP and those who believe there are better uses for their cash.

  10. Jonathan April 3, 2017 at 10:14 pm -

    I think everyone is making a big mistake here; all the old school businessmen would tell you that never pay a money today that you can pay tomorrow. Of course in a 15 years period you pay less interest as compared to 30 but the fact is you are poorer every month by half the amount of your monthly payment, meaning that extra money could go towards your life style, better food, school, trips etc etc. The extra interest you pay over 30 years is easily compensated by inflation or your house added value over the years. You just have lived all these years with less monthly income with a 15 year mortgage.

  11. Rosalie E. March 21, 2017 at 8:46 pm -

    Hi,

    Not sure if it is to our best interest to refinance. I have been trying to research a break even point and I just can’t get my head around it. We bought a house in 2005 on an interest only 5/1 ARM. I looked up historical data on the interest for the month of 10/2005 and it was 5.817%. The original loan was 450,000. We have been paying off both interest and principal since we bought the house. It is now down to 338,000. Do you think you can help us figure out if the quote for a 15 year fixed rate at 3.6% is worth it to refinance? Our current monthly is 2783.05 and I always pay 300 over. Our current rate is 3.5%. Sometimes when we have extra money, I pay more. We have a 2nd mortgage that will be paid off in 2 years and it will free $1750 to go towards this bigger loan.

  12. Colin Robertson March 3, 2017 at 10:22 am -

    Kate,

    If used for down payment it’s locked up in the house, if you keep it and go zero down you can decide what you’re comfortable putting into the home after the fact. But the interest rates might differ for zero down vs. putting up a large down payment. It also depends on how liquid you want to be vs. potentially cash poor. There’s also a potential middle ground I suppose. Good luck!

  13. Kate March 1, 2017 at 2:04 pm -

    Hi Colin, This is such a helpful article. My husband and I are considering purchasing a property for $610K using a 30year VA loan at 3.635% interest rate. We can get 0% down (with no funding fee, and no PMI, with no penalty for early payoff). We will have a chunk of cash that we had saved for a down payment $30-50K in the bank afterwards. Would you recommend putting that towards the principal in the first year vs using it as a downpayment to lower the loan amount?

  14. Colin Robertson February 16, 2017 at 10:21 am -

    Maria,

    Hard to say without knowing all the details, but it might be something to do with the lower modified monthly payments resulting in deferred principal and a balloon payment. Basically the payments you’re making now might not be sufficient to pay off the entire balance by maturation.

  15. Maria February 15, 2017 at 9:45 pm -

    Hi,

    I have a 30 year fixed mortgage. The original loan amount is $100,000. I am on year 10. Due to a loan modification, the bank change the maturity date from 08/2037 to 10/2037. All the modification did was lower my interest rate. I do not understand why my amortization schedule shows that I will have a balance of about $55,000 on the maturity date.

    Hope you can help me since the the rep from the mortgage servicing was not able to explain this as well. He submitted it for further research.

    Thank you.

  16. Colin Robertson February 15, 2017 at 3:29 pm -

    Liz,

    I don’t understand your question.

  17. Liz Rowe February 13, 2017 at 7:09 am -

    Hi! I have a question. If a yearly on the new 30-year,$75,000 mortgage is $7,300 and the payment is made at the end of each of the next 30 years. Suppose that the payment is made at the end of each month. Would 12 of these monthly payments be equal to one of the yearly payments?

  18. Colin Robertson January 30, 2017 at 4:44 pm -

    Sherrij,

    If you have a rate of 9%, you could potentially save a lot of money with rates being a lot lower these days. However, you do need to look at your remaining loan balance and the total interest that will paid if you don’t refinance versus the savings if you do decide to refinance. Also you may not want a long mortgage, and instead a 10-year fixed or shorter to avoid resetting the clock.

  19. Sherrij January 29, 2017 at 3:12 pm -

    I have 7 years left on my mortgage, the interest rate is 9%. I have cleaned up my credit and have a good score now. Should i refinance? I really need to do some home repairs and want to lower my monthly payments. What are my options?

  20. Colin Robertson January 24, 2017 at 9:43 pm -

    K,

    Probably best to just call the servicer and get the info from the horse’s mouth, but theoretically, yes, a new interest rate means a new amortization schedule to accurately estimate the payoff. And the principal amount would change each month anyway as the loan is paid down, though a dramatic drop in principal signifies a new, higher interest rate.

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