An amortization schedule is a table that breaks down the dollar amount of each monthly mortgage payment to show how much goes toward interest and how much goes toward principal for the duration of a mortgage.
The bottom line of the table sums these numbers to show the borrower’s total interest payments, total principal payments, and total overall cost to purchase and finance the home. “Amortize” means “to pay off gradually.”
The way interest is calculated when you borrow money to buy a home is different than the way interest is calculated on types of debt you might be more familiar with, like credit card debt. A mortgage has a predetermined payoff date, and if the loan has a fixed interest rate, it also has fixed monthly payments.
Toward the beginning of your mortgage term, most of your monthly payment goes toward interest. The way lenders calculate your monthly payment is that out of that fixed monthly amount, you first pay the interest you accumulated on your principal balance over the previous month, and whatever is left goes toward paying down your principal.
Each month your principal balance decreases. That means you owe less interest in the following month, and more of your fixed monthly payment goes toward principal. Your first mortgage payment goes almost entirely toward interest, while your final mortgage payment goes almost entirely toward principal.
The following example shows how the monthly interest and principal payments on an amortization table are calculated.
Amount borrowed: $100,000
Loan term: 15 years
Annual interest rate: 3.5%
Monthly payment: $714.88
Monthly interest rate: 3.5/12 = 0.29167%
Interest due for month 1: 0.29167% x $100,000 = $291.67
Principal payment for month 1: $714.88 – $291.67 = $423.21
New loan balance: $100,000 – $423.21 = $99,576.79
In month 2, you’ll pay 0.29167% interest on the new loan balance. That means you’ll pay $290.44 in interest and $424.44 in principal — slightly less interest and slightly more principal than in month 1.
This process continues every month for 15 years until your principal balance is zero. At that point, you will have repaid the $100,000 you borrowed plus a total of $28,678.86 in interest.
When you see the true cost of financing your home at the bottom of the amortization schedule, you might be concerned by how much interest you’re scheduled to pay. If so, you can make extra principal payments to pay down your mortgage faster and reduce your total interest expense.
An amortization schedule also helps clarify the key differences between taking out a 15-year fixed-rate mortgage versus a 30-year fixed rate mortgage. It lets you see how much more expensive the 30-year loan is over the long run and how much longer it takes you to accumulate equity with this loan.
Still, many borrowers prefer the 30-year fixed because its lower monthly payments are more affordable in the short term.
Let our amortization schedule calculator show you all of the principal and interest payments for your mortgage.