Amortization Schedules: How Your Mortgage Payments Work

Buying a home is a huge financial transaction. During the process, homebuyers will come across a variety of mortgage terms — and knowing what they mean can help them better understand their home loan.

“Amortization schedule” is one such term that is likely to arise. So, what is “amortization?" Amortization is the process of gradually paying off a debt over time through regular, fixed payments. For example, when you take out a loan, like a mortgage or a car loan, you don't pay the full amount upfront. Instead, you make monthly payments that cover both the loan's interest and a portion of the original amount (the principal). Over time, these payments reduce the balance until the loan is fully paid off by the end of the term. It's like spreading the cost of something over a set period.

An amortization schedule is presented as a table that shows how each mortgage payment will apply to the loan balance. Let’s unpack how a mortgage amortization schedule works and, most importantly, what it means for your monthly payment.

What Is a Mortgage Amortization Schedule?

An amortization schedule shows the details of all your future mortgage payments. If you just took out a 30-year mortgage, for example, your amortization schedule will show a breakdown of every monthly payment you’re scheduled to make until your home loan is paid off. More specifically, it shows the amount of each payment that will go toward your principal balance vs the amount that will go toward interest. Think of it as a snapshot of your mortgage loan.

If you’re using a mortgage to finance a home purchase, you can expect your loan to be amortized. This type of payment schedule allows you to chip away at both your principal balance and interest at the same time. These types of payments will help you to increase your home equity with every mortgage payment. Your equity is the amount of your home that you actually own, and it’s expressed as the difference between your remaining loan balance and your home’s appraised value. Therefore, bringing down your balance increases your equity.

Home Equity Example

Your amortization schedule shows you how each loan payment affects your home equity. Let’s pretend the current market value of your home is $500,000 and you owe $250,000 on your mortgage loan. That’s a $250,000 difference, which is half of the current value, translating to 50% home equity. You’ll reach 100% equity when your mortgage is paid off in full, and you own your home outright.

Components of an Amortization Schedule

You’ll notice three main pieces of information on an amortization schedule:

• Principal: This is your original loan amount (how much you borrowed from the lender to buy your home). Your principal amount will decrease with each mortgage payment, but a portion of every payment will also go toward interest.
• Interest: Think of interest as what you’re being charged to borrow the money. A chunk of each monthly payment will be allocated for interest.
• Remaining balance: Each line of an amortization schedule will show how each payment affects your outstanding loan balance.

Example of an Amortization Schedule

Your amortization schedule shows you exactly how much interest you’re paying each month. It also shows how much of each mortgage payment will go toward your principal balance. Let’s say you’re taking out a fixed-rate mortgage with a 30-year loan term for $300,000 (with a 5.25% interest rate). That works out to 360 total monthly payments. Below are the first few lines of what your amortization schedule might look like.

Interpreting an Amortization Schedule

During repayment, you’ll notice that a pretty large chunk of your initial payment amount will go toward interest. This will gradually change over time. As the years go on, the balance will shift so that more of your payment is allocated toward your principal balance. You may also notice that the total monthly payment stays the same over the life of the loan. Keep in mind that your payment could change if:

• You have an adjustable-rate mortgage (ARM): With an ARM, you can expect a fixed rate for the first few years. After that, your rate could bounce up or down with the market.
• Your homeowners insurance premiums or property taxes change: These expenses may be prepaid over time and wrapped into your monthly mortgage payments, depending on how you’ve set up your loan. If this is how your mortgage payments have been structured, a portion of your property taxes and insurance premiums will be tacked onto each monthly payment—which is not reflected in an amortization schedule—and put into an escrow account that’s managed by your mortgage lender. When these bills come due, the lender will pay them on your behalf. If these costs increase or decrease, your monthly payment will do the same (however, your amount due on the loan will remain the same).

How Amortization Affects Your Mortgage Payments

A mortgage is an amortized loan. (The same goes for auto loans.) The term “amortization” refers to how making regular payments in installments over time will reduce your principal and interest.

Following this schedule will not directly affect your mortgage payments. Again, your monthly payment should stay the same, unless you have an adjustable-rate mortgage or your taxes or insurance rates have changed. By sticking with your schedule, you’ll gradually pay off a larger portion of your principal balance each month.

Your amortization schedule can show you how much muscle is behind each of your monthly payments. You may get in the habit of making an extra principal payment, which could help you pay down your mortgage faster — and pay less overall interest. Just be sure that your mortgage lender doesn’t charge a prepayment penalty.

You can also see if your lender allows biweekly payments. This is when your monthly mortgage payment is split in two and paid every other week. After a year, you will have made one extra mortgage payment. That could reduce your total interest cost by tens of thousands of dollars in the long run.

Benefits of Understanding Your Amortization Schedule

An amortization schedule is unavoidable when taking out a mortgage, but that doesn’t mean it’s a bad thing. In fact, it can allow you to:

• Track your progress toward paying off your mortgage
• See how your monthly payment is being applied
• Motivate you to make extra payments toward your principal or enroll in biweekly billing
• Plan for future financial goals
• Consider how refinancing would impact your monthly payments and total interest

If you want to see your loan amortization schedule, you can use an online amortization calculator. You can also try logging in to your online account with your mortgage lender. It may be displayed somewhere in the portal. If not, you can request it from your lender.

The Bottom Line

Seeing your amortization table in black and white can be empowering—and it might nudge you to increase your number of payments or restructure your repayments. Even a few additional payments can save you money on interest. It can also help you weigh the pros and cons of a refinance.