Amortization is how a fixed-rate mortgage gets paid off: the same payment every month, divided between interest and principal, with the split shifting as the balance drops. Early payments are mostly interest because interest is charged on what you still owe. Each payment trims the balance, so the next month's interest is a little smaller and a little more of the same payment goes to principal.
A 30-year schedule on $300,000 at 5.75%
The payment is $1,750.72 a month. The first month's interest is $300,000 × 5.75% ÷ 12 = $1,437.50, which leaves $313.22 for principal. Selected payments split like this:
| Payment | Interest | Principal | Balance after |
|---|---|---|---|
| 1 | $1,437.50 | $313.22 | $299,686.78 |
| 12 | $1,420.59 | $330.13 | $296,140.70 |
| 60 | $1,335.45 | $415.27 | $278,286.49 |
| 120 | $1,197.50 | $553.22 | $249,360.24 |
| 180 | $1,013.74 | $736.98 | $210,825.40 |
| 240 | $768.93 | $981.79 | $159,490.26 |
| 300 | $442.80 | $1,307.92 | $91,102.83 |
Principal first passes interest at payment 216, 18 years in. The final payment, number 360, carries just $8.34 of interest and clears the last $1,741.14 of principal (it runs $1.24 under the regular payment, a rounding adjustment). Over the full term the borrower pays about $330,260 in interest on top of the $300,000 borrowed.
Page 3 of your Loan Estimate shows two numbers drawn from this schedule. "In 5 Years" lists the principal you'll have paid off by then, $21,713.51 on this loan. The total interest percentage (TIP) shows lifetime interest as a share of the loan amount, about 110% here.
What extra principal does
Because interest is figured on the balance, every extra dollar of principal cuts all the interest that dollar would have drawn for the rest of the loan. Adding $100 a month to the $300,000 loan above pays it off in 314 months, about 26 years and 2 months, and saves roughly $49,770 in interest. Mark any extra payment for principal when you send it so the servicer applies it to the balance.
Where amortization shows up in your loan
- Qualifying. FHA, VA, USDA and Conventional lenders all qualify you on the full amortizing payment, the $1,750.72 in this example, as part of PITI.
- PMI removal. On a Conventional loan, you can ask to cancel PMI once the balance reaches 80% of the original value, on schedule or sooner with extra principal. It ends automatically when the scheduled balance hits 78%, and no later than the schedule's midpoint, 15 years into a 30-year loan, as long as you're current.
- USDA's annual fee. The 0.35% fee is figured on the average scheduled balance each year, so it drops as the loan amortizes.
The mortgage payment calculator splits principal and interest for any price and down payment. For a full payment-by-payment schedule on a loan you're considering, call AAA Capital Funding at 888-601-8344.