06/23/2022
Home Terms Defined: Amortization 📅
Amortization is the schedule of your mortgage payments spread out over time. For example, a buyer's amortization schedule is usually a monthly payment scheduled over a 15- or 30-year period.
The best way to understand amortization is by reviewing an amortization table (if you have a mortgage, the table was included with your loan documents).
An amortization table is a schedule that lists each monthly loan payment as well as how much of each payment goes to interest and how much towards the principal amount. Every amortization table contains the same kind of information:
1) Scheduled payments: Your required monthly payments are listed individually by month for the length of the loan.
2) Principal repayment: After you apply the interest charges, the remainder of your payment goes toward paying off your debt.
3) Interest expenses: Out of each scheduled payment, a portion goes toward interest, which is calculated by multiplying your remaining loan balance by your monthly interest rate.
Although your total payment remains equal each period, you'll be paying off the loan's interest and principal in different amounts each month. At the beginning of the loan, interest costs are at their highest. As time goes on, more and more of each payment goes toward your principal, and you pay proportionately less in interest each month.
I included a sample amortization table here so you can see how that works, based on a $20,000 loan amortized over 5 years with a 5% interest rate. Home mortgages are obviously more likely to be 15 or 30-year loans and much larger, but for the purposes of easy, small numbers, this is just an example.
Note: Many people's mortgage payments also include 1/12 of the year's property taxes and home insurance costs. But for the purposes of understanding amortization, we're not including those costs in this example.
Talk to your loan officer or financial advisor for more info about amortization and how mortgages work. Don't know anyone? Let me know, I can connect you with an expert!
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