WHAT IS AN AMORTIZATION SCHEDULE?
By Jessica Hudson | August 1, 2022
Getting a new home is exciting and you might not give any thought to the several pages you received from your mortgage lender that make up the amortization table. This handy document outlines what your monthly payment is applied to. Given it changes each month, this can be an important tool.
Amortization is the process of spreading out a loan into a series of fixed payments over time. You’ll be paying off the loan’s interest and principal in different amounts each month, although your total payment remains equal each period. An amortization schedule is a complete table of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term. Early in the schedule, the majority of each payment is what is owed in interest; later in the schedule, the majority of each payment covers the loan’s principal.
Paying Down Your Principal Balance
If you are thinking about making extra payments towards your mortgage, the amortization calculator will allow you to easily see the benefit of reducing the principal balance on the loan. While your monthly payments won’t change unless you start over with a new loan, you can pay off your loan early by making additional payments.
For example, if you make an additional loan payment of $1,000, a calculator will show you that it saves you more than $1,000 during the life of the loan. That’s because the additional payment helps you amortize your loan faster; in other words, lower the balance and thus save on interest.
Three ways to pay down your balance faster include paying a little extra each month, making a lump-sum payment, and paying half of your mortgage every two weeks. Regardless of how you make extra payments on your amortizing loan, make sure your loan servicer applies the payment to the principal amount.