Mortgage Amortization Explained: Understanding How Your Payments Work Over Time

While the word amortization might sound complex, it's important to understand if you have or plan to get a home loan. In simple terms, it refers to how your mortgage is paid off over time through regular installments. Each payment you make is divided between paying down the principal loan amount and covering the interest that accrues, but the way the lender allocates these payments changes over the life of your mortgage.

So, how does amortization work? In the early stages of your mortgage, you can expect most of your monthly payments to go toward interest, with only a small portion being applied to the principal. Over time, your loan balance will start to decrease, and eventually a larger share of each payment will be applied toward the principal instead of interest. This gradual shift can help you build equity in your home.

The term of your mortgage plays a big role in what your amortization schedule looks like. For example, a 30-year mortgage will have lower monthly payments but will take longer to build equity, while a 15-year mortgage accelerates how quickly you can accumulate equity but comes with higher monthly payments. You can also speed up your amortization by making extra payments, which will reduce the loan balance faster and save you money on interest in the long run.

Whether you want to pay off your mortgage early or build equity faster, having a good understanding of how amortization works can help you get there.