Mortgage Amortization Tables Explained - Video Tutorial

By Brandon Cornett
© 2011 All rights reserved

A mortgage amortization table shows you how your monthly payments behave over time. In the early years of your payback period, most of your payment will be applied toward interest. A lesser portion goes toward the balance. This trend usually reverses over time. The video below explains it in more detail.

Video Transcript: Today we are going to talk about a big, scary word that applies to mortgage loans. And that word is amortization. (It's pronounced a-more-tie-zay-shun, by the way.) You'll hear this word a lot during the mortgage process, and you'll probably see it written in your mortgage documents as well. It's a big word, but it's actually harder to pronounce than it is to understand. We will look at a sample amortization table in a moment. But first, I want to start with a basic definition.

Mortgage amortization is the general reduction of your mortgage balance over time. You make your payments every month, and those payments are applied to the principal balance in a systematic way. The principal goes down over time, and this is referred to as amortization.

Let's look at an example using a 30-year fixed-rate mortgage. As you know, a fixed-rate loan has the same interest rate and the same size payment over the length of the loan. The total payment is the same, but the way the payment is divided actually varies over time.

When you make a mortgage payment, you're paying two things. There's an interest component, which comes from the interest rate charged by the lender. And there's also a principal component, which goes toward the principal amount you borrowed. (Your payments might also include a certain amount for property taxes and homeowners insurance, but that's not relevant to this lesson.)

The amount of principal and interest that is included in each payment will vary over time. You might wonder how this could be possible for a fixed-rate mortgage loan. The monthly payment is the same over the life of the loan, right? Yes. But the way those payments are divided changes over time. And this is exactly what a mortgage amortization table shows you. These tables are also referred to as schedules. You'll hear these terms at some point during the mortgage process.

So the amortization table tells you how your loan is repaid over time. It shows what portion of your monthly payment goes toward interest, and what portion goes toward reducing the principal. This will make a lot more sense if you watch the video at the top of this page, by the way.

Early in the term of the loan, most of your monthly payment will go toward interest. A smaller portion will go toward the principal. Therefore, you don't reduce your principal very quickly in the early years of the payback period. Over time, however, this will change.

Let's say your about 15 years into a 30-year mortgage loan. At this stage, you might see an even split where half of your payment goes toward interest, and half gets applied to the principal. When your mortgage gets toward the end of its term, most of your payment will go toward the principal. A smaller amount will go toward interest, because you'll be nearly finished with your total interest charges. This is how a typical mortgage loan works, anyway. There are exceptions to the rule.

Sample Amortization Table

Here's an example of a mortgage amortization table.  You can see that the bars are all the same size. This means the size of the monthly payment stays the same over the life of the loan. The axis going across the bottom (where it shows odd numbers 1 - 29) represents the 30-yer term of the loan. The peach color represents the interest portion of the monthly payments, and the dark-orange color represents principal.

On the left side of the table, you can see that most of the payment goes toward interest (the peach-colored portion of the bar). Around year 15, you can see the two colors are nearly even. This means each of the payments are split evenly between interest and principal. Now look over on the right said, where it shows years 25 - 29. You can see that almost all of the mortgage payment is now going toward principal reduction.

Mortgage amortization tables can work out in different ways, depending on the type of loan you use. But the sample table above gives you a good idea of the basic concept.

So let's recap some of the key points in this lesson:

Mortgage amortization is the general reduction of the loan balance over time. The amortization table or schedule shows how this happens in a systematic fashion, with part of your payment going toward interest and the other part going toward principal. Like I said, it's harder to pronounce the word than to understand the concept behind it. It's fairly straightforward.

The purpose of this video lesson is to make you more familiar with the basic principles of mortgage amortization. That way, when a lender pulls out an amortization table to show you how your loan will "behave" over time, you won't be totally confused.

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