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9 min read May 29, 2023

Understanding Mortgage Amortization: Excel Template Included

A mortgage amortization schedule tells you exactly how many monthly payments you will make to your lender. A mortgage amortization calculator will show you how your monthly payments spread out.

A part of your payment goes towards the principal amount and the rest goes towards the interest.

In this blog post, we’ll explore the concept of mortgage amortization in greater detail. Including its benefits, the different types of mortgages available, and factors that can impact the amortization process.

Additionally, we will discuss the mortgage amortization schedule and how it’s calculated.

Key Takeaways

  • Amortization Schedule A mortgage amortization schedule or amortization table tells you exactlty what you’ll be each month of your mortgage.
  • Amortization Template: Check out free amortization excel template

What is Mortgage Amortization?

Mortgage amortization is the process where a borrower repays their loan gradually through regular monthly payments. They divide the total loan amount, including interest, into equal installments over a specific period.

Each payment includes both principal (the borrowed amount) and interest (the borrowing cost), with the allocation changing over time. Regular payments reduce the loan balance and by the end of the amortization period, your loan is over.

Amortization With Fixed-Rate Mortgages

With a fixed-rate mortgage, the interest rate remains constant throughout the loan term. Although, the amount applied to the principal and interest will change monthly.

Fixed-rate mortgages are ‘fully amortizing’ meaning your loan is closed once you make all payments.

📌 Fixed-Rate Mortgage: Learn what a fixed-rate mortgage is, how it works, its pros and cons, and whether it’s for you!

Amortization With Adjustable-Rate Mortgages

Amortization is a key aspect of adjustable-rate mortgages (ARMs). With an ARM, lenders periodically adjust the interest rate based on market conditions. This leads to changes in the monthly mortgage payment over time.

During the initial fixed-rate period, which typically lasts 5 to 10 years, the interest rate remains steady, and the loan amortizes similarly to a fixed-rate mortgage. However, after this period, the interest rate may adjust annually or at predetermined intervals, based on a specific index and margin.

As the interest rate adjusts, the monthly mortgage payment can change, directly impacting the amortization schedule. This adjustment affects the proportion of each payment that goes towards interest and principal, consequently altering the loan balance.

Borrowers must carefully review the terms of their ARM to understand how these adjustments will influence their amortization and monthly payments. It is crucial to consider potential interest rate fluctuations and plan accordingly to manage the impact on the amortization process.

What is a Mortgage Amortization Schedule?

A loan amortization schedule is a helpful document that shows the repayment plan for your mortgage loan. It breaks down each monthly payment, indicating how much goes towards the principal and interest.

The schedule also displays the remaining loan balance after each payment, allowing you to track your progress in paying off the mortgage.

It’s a useful tool to understand how your loan is being paid down over time. Moreover, you can see how much interest you’re paying versus the principal amount.

The amortization schedule typically includes the following information for each payment:

  • Payment number: This refers to the number of payments being made.
  • Payment date: This is the date on which the payment is due.
  • Principal payment: This is the amount of the payment that goes towards reducing the principal balance of the loan.
  • Payment amount: This is the total amount due for the payment, including both principal and interest.
  • Interest payment: This is the amount of the payment that goes towards paying the interest charged by the lender.
  • Remaining balance: This is the outstanding balance of the loan after the payment has been made.

» Download and edit the free amortization schedule Excel template below:

It is important to note that the amortization schedule for mortgages is based on the terms of the loan. This includes the interest rate and loan amount. Changes to any of these factors can impact the schedule and the overall cost of the loan.

How to Calculate Mortgage Amortization?

Let’s say you take out a 30-year fixed-rate mortgage for $$440,300 with an interest rate of 6.57%. Your monthly payment would be $$2,803.30. In the first month, $2,410.64 of your payment would go towards paying off the interest and only $392.65 would go towards paying down the principal.

This means that at the end of the first month, you would owe $439,907.35 and next month’s interest will be calculated on this amount.

Over time, the amount of each payment that goes towards paying off the principal increases, while the amount that goes towards paying off the interest decreases. After 360 months the principal amount would become zero and you have paid off your mortgage.

A step-by-step guide to creating an amortization schedule:

  1. Gather Loan Information: Collect all the relevant information about your mortgage loan, including the loan amount, interest rate, loan term, and start date.
  2. Calculate Monthly Payment: Use a loan calculator or mortgage calculator to determine your monthly payment. This will be the same amount you pay each month for the duration of your loan term.
  3. Calculate Interest Payment: Determine how much of your monthly payment will go towards interest. To do this, multiply the outstanding balance of your loan by the interest rate (in decimal form), then divide by 12 (for monthly payments).
  4. Calculate Principal Payment: Subtract the interest payment from the monthly payment to determine the amount that will go towards paying down the principal balance of the loan.
  5. Calculate Remaining Balance: Subtract the principal payment from the outstanding balance of your loan to determine the new balance.
  6. Repeat Steps 3-5: Repeat Steps 3-5 for each month of the loan term, using the new balance from the previous month to calculate the interest and principal payments for the current month.
  7. Create a Mortgage Amortization Table: Create amortization tables that display all the calculated information for each month. Include the payment number, payment date, payment amount, interest payment, principal payment, and remaining balance.
  8. Review and Adjust: Review the mortgage amortization schedule to ensure accuracy and adjust if necessary. You can also use the schedule to explore different scenarios, such as making extra payments or refinancing your loan.

There are also online mortgage amortization schedule calculators that can automate the calculations and generate a table for you. These amortization calculators can save time and reduce the likelihood of errors.

How Do Lenders Determine Your Monthly Mortgage Payment?

Lenders determine your monthly mortgage payment by considering various factors. They assess the loan amount, interest rate, loan term, and any additional fees or insurance costs.

Using an amortization formula, they calculate the fixed monthly payment needed to repay the loan in full over the specified period. Lenders may also include property taxes and homeowners insurance in the monthly payments as escrow amounts to cover these expenses.

📌 Average Mortgage Payment: Explore what the average mortgage payment is and how it varies across the United States.

Why is the Amortization of Loans Important?

An amortization schedule will show you how much you are paying as interest over your entire mortgage term. You will be able to see how you can make extra payments to reduce your overall expenditure.

Here is an example derived from the Houzeo mortgage amortization schedule.

Principal Amount Interest RateTerm Total Interest Paid
$440,3006.57%30 Years$549,662.91
$440,3006.57%15 Years$253,140.91

You pay nearly double the interest for a longer mortgage term!

📌 Mortgage Points: Mortgage points enable you to secure a lower interest rate when buying a home. Ready to save more?

Benefits of Mortgage Amortization

Mortgage amortization offers a number of benefits to both borrowers and mortgage lenders.

For borrowers, mortgage amortization allows them to spread the cost of a large purchase, such as a home, over a period of time, making it more affordable. This allows them to build equity in their home and eventually own it outright.

For lenders, mortgage amortization provides a steady stream of income over a fixed period of time. This reduces their risk of default and helps them manage their cash flow.

Factors That Affect Mortgage Amortization

Several factors can impact the mortgage amortization process, including the length of the loan term, the interest rate, and the amount of the principal.

Loan Term

The length of the loan term can have a significant impact on the mortgage amortization process. Longer loan terms, such as 30-year mortgages, will have lower monthly payments but will result in total interest paid over the life of the loan.

Shorter loan terms, such as 15-year mortgages, will have higher monthly payments but will result in less total interest paid.

Interest Rate

The interest rate on loans also plays a role in the mortgage amortization process. Higher interest rates will result in higher monthly payments and total interest paid over the life of the loan. Conversely, lower interest rates will result in lower monthly payments and less total interest paid.

Principal Amount

The amount of the principal can also impact the mortgage amortization process. A higher loan amount will result in higher monthly payments and total interest paid. While a lower loan amount will result in lower monthly payments and less total interest paid.

How to Pay Off Mortgage Early

There are a few ways you can pay off your mortgage early. You can save a lot of dollars in the long run!

  • Refinance Your Mortgage: When you refinance a home, you apply for a new mortgage loan to replace your existing one. The process involves similar steps to obtaining a mortgage such as researching lenders, comparing rates and terms, submitting an application, and providing required documentation. Refinancing can help lower interest rates, adjust loan terms, or access equity.
  • Make Extra Mortgage Payments: You can pay extra with your monthly mortgage payments to quickly pay off your loan. However, your lender must approve extra payments without penalties. Talk to your lender and make sure the extra payments go towards your principal amount and not interest.
  • Dollor-a-Month Plan: Yes, you can simply pay an extra dollar each month to reduce your mortgage term. For example, for a 30-year mortgage of $150,000 at 6% you can reduce 8 years by paying an extra dollar every month.

Bottom Line

Monthly mortgage payments need not be a headache. When you follow your amortization plan with discipline you stay on track and do not default on your home loan.

Use an amortization schedule and amortized loan calculator to fully understand how and where your money is spent.

Frequently Asked Questions

1. How to use a mortgage amortization calculator?

To use a mortgage amortization calculator, input loan details such as loan amount, interest rate, and term, then click calculate to generate an amortization schedule showing payment details and remaining balance.

2. How do I calculate monthly mortgage payments?

To calculate monthly mortgage payments, you need the loan amount, interest rate, and loan term. Use the following formula: P = (A * r * (1 + r)^n) / ((1 + r)^n - 1), where P is the monthly payment, A is the loan amount, r is the monthly interest rate (annual rate divided by 12), and n is the total number of monthly payments (loan term in years multiplied by 12).

3. How to calculate loan amortization?

To calculate loan amortization, use the formula P = (A * r * (1 + r)^n) / ((1 + r)^n - 1), where P is the monthly payment, A is the loan amount, r is the monthly interest rate, and n is the total number of monthly payments (loan term in years multiplied by 12). Calculate the principal and interest portions of each payment to create an amortization schedule.

4. Can you re amortize your mortgage?

The process of re-amortizing a mortgage typically involves adjusting the terms of the loan, such as the interest rate or loan term, in order to modify the payment schedule. This would typically require contacting your mortgage lender or financial institution to discuss available options.


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