Learning how the amortization of a mortgage works can help you understand where your monthly payment is going and potentially allow you to pay off your loan earlier.

What is amortization?

Amortization is the process of spreading a loan out into a series of fixed payments over a period of time. When you apply for a new loan, you can ask to see an amortization table. The amortization table lists every payment over the life of your loan and tells you how much of that payment pays down the principal on your debt, how much goes towards interest, and how much principal remains on the mortgage. By looking at your amortization table, you can determine how much principal will remain on your loan at any date in the future.

Why interest and principal payments change over time

When paying off a loan, the amount paid in interest and principal shifts over time. The reason you mostly pay interest at the beginning of your mortgage is because this interest burden is directly calculated according to the current size of your debt. When your debt is large (at the beginning), you owe more in interest. And when your debt is small (towards the end), you will owe less. A higher percentage of your payment goes towards principal with each passing month, simply because you paid down your debt a little bit with the previous payment.

What happens when you pay extra?

This might have you wondering, “What happens if I choose to pay extra on my principal?” What happens is that your debt is reduced and your full amortization table shifts in your favor, shortening the term of your loan, reducing the total amount of interest paid, and increasing the portion of your next and every subsequent monthly payment that pays down principal.

Why structure loans in this way?

The primary reason homeowners choose a fixed rate loan with amortization is for the ease of long-term financial planning. Most buyers like knowing exactly how much their monthly payment will be over the life of their loan.

Questions?

If you still have questions or would like clarification about how mortgage amortization works, speaking with a mortgage broker may help. It’s a mortgage broker’s job to help you find the right lending solution for your home and to ensure that you understand how the loan’s repayment structure will affect your financial situation.

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