What Is Amortization?
Amortization refers to paying off a debt over time in regular installment payments. One part of every installment goes towards paying down the principal of the loan, and the other part goes towards the interest on the loan. Mortgage amortization has to do with the gradual increase over time of your monthly payment that goes towards the loan principal rather than the interest.
For fixed rate loans, then, you end up paying less and less interest each month.
This is true of debt tied to mortgages, auto loans, or personal loans where payments are made each month to the lender. This is not the case with all types of debt—credit cards, for instance, tend not to be amortized but the debt is revolving. With such loans, the outstanding balance is carried from month to month and the amount to be paid every month can vary. On interest only loans, there is no amortization of principal during the interest only period. Balloon loans do not fully amortize since there is a balloon payment due at the end of the term.
What is an amortization schedule?
An amortization schedule is a graphic or table which shows how much of your installment goes towards the principal and interest over time. Such a schedule will list every payment on a mortgage over time and shows how much of the payment is applied towards the principal and the interest.
You will notice that at first, the bulk of your payment goes towards the interest. You will also notice that a larger and larger share of your payment will go to pay the principal over time until it’s finally paid off.
While some amortization schedules do not take extra payments into consideration, borrowers have the right to pay extra towards their loan if they choose. Amortization schedules generally work for fixed-rate loans as opposed to adjustable rate mortgages, variable rate loans, or lines of credit.
Here we’ve provided an amortization calculator to see how your installments will break down over the life of your loan.
What is an amortization calculator good for?
Using a mortgage amortization calculator will allow you to see how much principal you will owe on a mortgage (at a certain interest rate input by you), how much more you will need to pay every month to repay your loan, and determine how much interest you will pay over the life of your loan.
Even more importantly, an amortization calculator can help you figure out how much equity you will accrue in your home over time as you make payments.