What Is Mortgage Amortization?

What is mortgage amortization?

"Amortization" is a word for the way a mortgage is repaid: Your monthly mortgage payment stays the same from month to month (not counting taxes and insurance), but the percentage of that payment going to the principal versus the interest changes over time.

In the first years, most of each payment goes toward interest and only a little pays off the debt. That ratio gradually changes, and eventually it flips. In the later years of the mortgage, most of the payment pays off principal, and a smaller proportion goes toward interest. That's amortization in a nutshell.

Amortization is more than a concept. It's a tool for understanding how much you still owe in any given month, how much interest you've paid so far and how much interest you'll pay over the life of the loan.

NerdWallet's mortgage amortization calculator gives you this information and more.

What is a mortgage amortization calculator for?

Using a mortgage amortization calculator, you can:

• Find out how much total interest you would pay over the life of a loan.

• Determine the remaining loan balance in any given month.

• Figure out how much of each month's payment goes toward principal (debt reduction) and how much goes toward interest.

• Compare the total cost of a 30-year loan versus a mortgage with a shorter term, such as 15 years.

What the mortgage amortization calculator does

Using the 'Amortization Schedule' tab

An amortization calculator can tell you how much interest you will pay over the loan's entire term by sliding the graph's vertical bar all the way to the right. It can also tell you how much interest you'll pay over a certain number of years (for example, total interest in the first 10 years). To do that, slide the vertical bar rightward for the desired number of years.

In addition, the calculator can tell you how much debt you'll pay off in a certain number of years (see the number next to "Principal Paid."). It can give you a year-end snapshot of how much principal and interest you have paid over the life of the loan (the numbers next to "Principal Paid" and "Interest Paid"), as well as how much you still owe ("Remaining").

Using the 'Compare Loan Types' tab

It can help you compare the monthly payments and total interest for a 30-year loan versus a 15-year mortgage.

An amortization calculator will allow you to create an amortization schedule, which is a monthly breakdown of how much of each payment goes toward principal and how much goes toward interest. You can see the amortization schedule by selecting the "Breakdown" tab.

What does amortization mean in a mortgage?

Because it is amortized, a mortgage's loan balance decreases gradually at first. That means your payments build equity slowly in the first years of the mortgage. You build equity more quickly in the final years of the mortgage.

To accountants and business owners, "amortization" has other meanings, too. But for homeowners, mortgage amortization means the monthly payments pay down the debt predictably over time.

» MORE FOR CANADIAN READERS: Amortization period vs. mortgage term