May 23, 2019

Amortization: Filling Up Your Tank

At closing, you received a detailed amortization schedule – an important table that serves as the financial fuel gauge of your mortgage. This table outlines every monthly payment you'll make over the term of your loan, showing how your contributions fill up your tank (equity). Equally important, it will show the true cost of your home over the life of your loan.

Breaking This Down

Let's say 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.

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

As you can see, in the beginning years of homeownership, the largest portion of your payment is applied to interest versus principal and you're building equity at a slower pace. As the loan progresses, you see more of your payment applied to your principal, paying down your balance at much greater speed.

Be sure to pay your mortgage on time so you stay on schedule and don't incur any late fees.  If you can, consider paying a little extra every month and apply it to your principal.  You'll fill up your tank faster and pay off your mortgage sooner.

What to know more about the homebuying process? Be sure to follow our spring homebuying series.

Next Stop...You're a Homeowner, Now What?