What Is Mortgage Amortization?

If you’re paying off your mortgage, you’re not just paying the cost of your home. You’re also paying interest. 

But do you know how much of each payment goes toward paying off your home versus paying interest to a bank? That allocation is decided via something called “mortgage amortization.” 

What is mortgage amortization, and how does it work? We’ll take a closer look.

What is mortgage amortization?

Mortgage amortization is a calculation that determines how the composition of your mortgage payments shifts over time. 

You shouldn’t confuse mortgage amortization with your loan term:

• Loan Term: The length of the payoff period (usually 15 or 30 years)
• Mortgage Amortization: How your payments are divided between interest and principal over time

With a traditional fixed-rate mortgage, your monthly payments stay the same over the life of your loan. Amortization makes that possible. 

Early payments mostly go toward interest, and later payments primarily go toward the principal (the amount of money you borrowed to finance your home). 

Take note that amortization doesn’t apply to escrow accounts. If you pay your homeowners’ insurance premiums and property taxes through your lender, your total payments may fluctuate over time, typically increasing as taxes and insurance become more costly.

Front-loading interest through amortization reduces the risk for lenders. It also means that it may be several years before you build any meaningful equity.

What is a mortgage amortization schedule?

How does amortization of a mortgage work? When you buy your home, your closing documents will usually include something called an “amortization schedule.” This schedule will show the following data points for each scheduled payment:

• The amount of the payment that goes toward interest
• The amount of the payment that goes toward principal
• Your remaining balance
• The amount of interest paid to date
• The amount of principal paid to date

If you have enough money to make more than your minimum payment each month, you can get ahead of this amortization schedule. Putting extra toward the principal will lower the total amount of interest you pay over the life of the loan.

What is mortgage amortization in fixed-interest versus adjustable-rate mortgages?

When you buy a home, you may be offered two broad categories of mortgages:

• Fixed-Rate Mortgages: Rates stay the same over the life of the loan
• Adjustable-Rate Mortgages: After a certain period, rates change with the market

It helps to understand how amortization works with these two types of mortgages.

Fixed-rate mortgages 

With a fixed-rate mortgage, you pay the same amount each month. At first, these payments are almost entirely interest. Each month, you pay a little more toward the principal and a little less toward interest. By the end of the loan term, the payments go almost entirely toward the principal.

Most mortgages are fixed-rate mortgages.

Adjustable-rate mortgages

Like fixed-rate mortgages, adjustable-rate mortgages require you to pay more interest than principal at the beginning of your loan term. However, the amount of your payment (and how it is applied to principal versus interest) is less predictable.

Notably, adjustable-rate mortgages usually start with a period of fixed interest. That period can be up to 10 years. Once you complete this period, your rate is adjusted according to the market every 6 or 12 months.

Each time your rate changes, your loan’s amortization schedule must be recalculated. This kind of unpredictability can be stressful, but if rates fall, your monthly payments could go down.

How does your credit score impact mortgage costs?

When you apply for a mortgage, your lender will assess your credit report and credit score. Higher credit scores translate to lower risk for lenders, so the higher your score, the lower your interest rate is likely to be.

With a low credit score, you may be saddled with high interest rates, if you can even get approved for a mortgage at all.

Different lenders have different decision-making processes, but here are some example credit score ranges:

• Excellent (760–850): Lowest rates
• Good (700–759): Lower than average rates
• Fair (660–699): Somewhat higher than average rates
• Low (620–659): Much higher than average rates
• Poor (Less Than 620): Low likelihood of approval

If your mortgage has a high interest rate, you’ll pay more over time. You’ll also build equity in your home much more slowly.

Are you thinking about applying for a mortgage in the near future? Working to build your credit score can really pay off. Kikoff can help you get started. 

We’re a credit-builder app that gives people with poor credit, limited credit histories, or no credit at all the tools to build their credit scores. It’s free to join, and we don’t rely on interest, traditional loans, or hard credit checks.

Getting ready to take out a mortgage?

Your home may be the biggest purchase you’ll make in your lifetime. Before you take out a mortgage, make sure that you fully understand how amortization works. Even a handful of strategic extra payments may significantly reduce the amount of interest you pay over time.

Improving your credit score before you apply can also result in significant savings. Build credit responsibly with Kikoff’s plans.