If you repay a mortgage according to an amortization schedule, it means you’ll make payments in monthly installments over the life of the loan. These payments are applied to your loan principal as well as interest—usually more of your payments go toward the interest earlier in your repayment term.
Most mortgages are amortized, so you’ll know exactly what you owe each month without any surprises. You can use an amortization calculator like the one below to estimate your monthly payment schedule.
How To Use the Mortgage Amortization Calculator
A mortgage amortization calculator can be a helpful tool to estimate how your payment schedule will break down month by month. After entering the loan amount, repayment term, interest rate and loan start date, you’ll see how much your monthly payments will be and how many payments you’ll owe over the life of the loan. You’ll also see your total interest costs and total repayment costs as well as your estimated payoff date.
You also have the option to indicate if you plan to make any extra payments to get an idea of how much you could save on interest and if you could shorten your repayment time.
Mortgage Amortization Calculator Definitions
- Loan amount. This is the amount you borrowed from your mortgage lender to cover the purchase of your home.
- Interest rate. Lenders charge interest in return for allowing you to borrow money. Your mortgage interest rate represents how much you’ll be charged in interest, expressed as a percentage of your loan principal.
- Loan term. This is the number of years you have to repay your mortgage. Common mortgage terms include 10, 15 and 30 years, though other terms are also available.
- Number of payments. This represents the total number of monthly payments you’ll make over the loan term. For example, if you have a 15-year loan, you’ll make roughly 180 monthly payments.
- Monthly payment. This is how much you’ll be required to pay each month. A portion of this will go toward your loan principal while the rest will go toward interest.
- Extra payments. If you’d like to pay off your loan faster, making extra payments could be a good strategy. This can also save you money on interest.
- Lump-sum payment. If you have extra money in the bank, you might decide to put it toward your mortgage—this is known as making a lump-sum payment. In this case, you could opt to recast your mortgage, which won’t change your loan term or interest rate but can lower your monthly payments with a shorter amortization period.
- Principal and interest. Your loan principal is the exact amount you borrow from the lender. Interest is what you pay the lender in exchange for borrowing money. Your monthly payments will be divided between principal and interest. Typically, your payments will cover more interest earlier in your loan term while later payments will be mostly applied to your principal.
- Total interest. This is the total amount you’ll pay in interest charges over the life of your loan.
- Total cost of the loan. This is the total you’ll pay on your mortgage, including both principal and interest.
- Payoff date. This is the estimated date by which you’ll have paid off your entire loan.
What Is Mortgage Amortization?
Mortgage amortization is a financial term that refers to the process of paying off your mortgage in monthly installments according to an amortization schedule. Your mortgage amortization schedule will show how your monthly payments will be split between principal and interest and how this will shift over time as you pay off more of your loan.
In general, most of your payments will go toward paying off the interest compared to the principal on the front end of the loan period. In other words, interest is front-loaded at the beginning of the loan period. However, this will reverse over time, and you’ll eventually pay more toward the principal and less toward interest over the course of the loan.
How Does Mortgage Amortization Work?
Mortgage amortization refers to the process of making regular, scheduled payments on a loan.
With each mortgage payment, you’re paying both interest and a portion of the principal. The principal is the amount of money you borrowed, and the interest is calculated on your remaining balance.
For the first few years of mortgage payments, you may see that most of your payment goes toward the loan’s interest. As you begin to chip away at the balance, a larger portion of your payment is applied to the principal.
Your loan’s amortization schedule uses a formula to determine how much you pay in principal and interest. It’s based on your loan term. If you stick to your scheduled payments, you’ll pay off the last of the principal at the end of the mortgage term. If you make extra principal payments, you’ll pay off your loan ahead of schedule.
How To Calculate Mortgage Amortization
Mortgage lenders can provide an amortization schedule to borrowers, but you can easily do the math yourself. Here are the steps to take:
- Start with the current balance of your loan.
- Convert your interest rate to a decimal and multiply that by the balance.
- Divide that answer by 12 for the monthly interest charge.
- Subtract the monthly interest charge from your monthly payment.
- The remainder is how much you are paying down the principal for the first month.
Then, you can subtract that principal payment amount from your balance and repeat the steps for month two and so on.
While this can be an interesting exercise, using a mortgage amortization calculator is a much faster way to view your entire payoff schedule.
How Calculating Amortization Helps You
Calculating your mortgage amortization can help you figure out how several important details about your loan, including:
- How much you’ll pay toward principal and interest each month
- How much you’ve paid in total so far each month—and how much you still owe (now or at a future date)
- What your total interest and repayment costs will be
- How making extra payments can save you money on interest or shorten your repayment time
You can also use the mortgage amortization calculator to estimate information like how much you’d need to pay extra to pay off your loan by a certain time or how much home equity you’ve built.
How To Pay Off Your Mortgage Faster
There are several strategies that could help you pay off your mortgage faster such as:
- Making extra payments. Whether you put a little extra toward your loan each month, make an extra payment each year or make biweekly payments instead of monthly, this can help you repay your loan more quickly and save you money on interest.
- Recasting. If you have some additional funds in the bank or come into some money unexpectedly, you might consider making a lump-sum payment toward your mortgage and recasting the loan. While this won’t change your interest rate or term, it will lower your monthly payments—and if you opt to apply your savings to your loan, you could pay it off even faster.
- Refinancing. You could also consider refinancing your mortgage, which is where you pay off your old loan with a new loan with different terms. Depending on your credit, this might get you a lower interest rate, which could save you money on interest and potentially help you pay off your loan faster. You could also choose to shorten your repayment term—but while this will reduce your overall interest costs, it will also likely increase your monthly payments.
Keep in mind that some lenders charge prepayment penalties. So if you plan to pay off your mortgage ahead of schedule, be sure to check with your lender or review your loan agreement to see if any of these fees will apply to you.
Frequently Asked Questions (FAQs)
How do you calculate amortization with an extra payment?
Many mortgage amortization calculators include the option to add extra payments, making it easy to determine how quickly you can pay off your loan. If you want to do the math yourself, simply subtract the extra payment from your balance each month when doing the calculation.
What does fully amortizing mean?
If a loan is said to be fully amortizing or amortized, it simply means that when you make your final payment on the schedule, you’ll have paid off the loan in full.
What is the difference between interest only and fully amortized?
With an interest-only loan, you’re only paying off the interest charges that have accumulated. You aren’t paying down the principal, and your balance will not get smaller.
A fully amortized loan has payments that include both principal and interest, meaning that you will eventually pay off the loan by making these payments.
