FreddieMac.com
May 14, 2018

Life often feels dictated by schedules. Your schedule for work. Your schedule for home. Your kids' Little League schedule. And you have a schedule for sleep, chores, even television. The list goes on and on. But when was the last time you thought about your home's amortization schedule? Wait... My what?

What exactly is amortization, what is an amortization schedule, and why does it matter?

Your amortization schedule is an important table that details the amount of principal and interest that you will pay on your mortgage each month. This ultimately provides you with the true cost of your home over the life of the loan.

Still confused? Let's look at an example:

You bought your home for \$150,000 with a down payment of 10%, resulting in a loan amount of \$135,000. You secured a 30–year fixed–rate mortgage at 4.5% interest with a monthly mortgage payment of \$684.03.

Following are highlights from the full amortization schedule on your loan.

Date Date Interest Interest Principal Principal Balance Balance
Month 1 \$506.25 \$177.78 \$134,822.22
Month 24 \$490.27 \$193.76 \$130,544.24
Month 48 \$472.06 \$211.97 \$125,669.68
Month 72 \$452.13 \$231.89 \$120,336.96
Month 96 \$430.34 \$253.69 \$114,503.01
Month 180 \$335.31 \$348.72 \$89,067.12
Month 360 \$2.56 \$681.47 \$0

Assuming that you stayed in your home for 30 years, you would pay over \$246,249 in principal and interest over the life of the loan. To illustrate the power of interest rates, on this same loan with a 7% interest rate, you would pay \$323,337 in principal and interest.

Notice how the amount of principal and interest paid flip over time? Look at the full schedule to see the shift happen month–to–month. In the early years of homeownership, the largest portion of your payment is applied to interest, meaning you're building equity at a slower pace. But as the life of the loan progresses, you see more of your payment applied to your principal, which pays down your balance faster. Why? Because the interest you are charged each month is calculated using your outstanding balance, which gets smaller with every payment you make.

If you have a fixed–rate mortgage, your amortization schedule ensures that you'll have a consistent payment for the life of your loan. Your monthly payments are divided into equal amounts over the duration of the loan — that's 360 payments with a 30 year term — allowing you to budget and plan your finances for the long term.

If only all your schedules were this consistent…