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Mortgages

What is mortgage amortization and how do you use it to save money on your home loan?

Understanding mortgage amortization helps you strategize on how to manage your loan.

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For many first-time homebuyers, the process of managing a mortgage often feels like a never-ending mystery: Every time you get one question answered, another seems to crop up. If you've already begun exploring the homebuying process for yourself, one term you might have heard getting thrown around is "amortization schedule."

Your amortization schedule is what's used by your lender to anticipate what your monthly payments will look like. Borrowers can access their amortization schedules and even use them to save money on their mortgage payments. Below, CNBC Select breaks down some key things to know about mortgage amortization.

What is mortgage amortization?

Mortgage amortization simply refers to the process of paying off your home loan in regular monthly payments over a fixed period of time. So if you get a mortgage with a 15-year term, it means the total cost of the loan will be spread out over 15 years. What may leave many individuals scratching their heads, though, is the amortization schedule.

An amortization schedule (also known as the amortization table) is a breakdown of how much of your monthly payment goes toward the loan's principal vs. the interest.

When you first start making mortgage payments, most of your payment will go towards the loan's interest. But as the months go on, your payment composition shifts from favoring the interest to the principal. At some point, usually several years into paying off your mortgage, most of your monthly payment will go toward the principal instead of the interest.

How do extra payments affect your monthly payment?

When done correctly, an amortization schedule can shed some light on how your interest payments are calculated. The monthly interest is based on the remaining loan balance. So as you pay down the principal over time, the amount of interest you pay gets lower even though the interest rate stays the same on a fixed-rate loan. In other words, owing 5% of $100 ($5) is more than owing 5% of $50 ($2.50).

So if you make extra payments toward the principal, both your balance and the amount owed in interest can decrease faster. If you'd like to explore making extra monthly payments, ask your lender for your loan's amortization schedule so you can see how extra payments help you more quickly pay off the principal or lower the amount of interest you pay.

If you plan to make extra payments toward your mortgage, make sure you're aware of any prepayment penalties the lender might charge. A prepayment penalty is a fee paid by borrowers for paying off a loan early (before the agreed-upon term ends). Not all lenders charge prepayment penalties, so you'll want to double-check with your lender before making any extra payments.

How do you save money on your mortgage?

Homeownership can be a costly experience when you consider the fact that you'll pay interest on your home loan plus homeowners insurance, PMI (if you put down less than 20%), property taxes and more. However, you have options that can make those mortgage payments a little easier to bear.

Make biweekly mortgage payments

Making biweekly mortgage payments can save you more money over the life of your loan than you might think. When you make monthly payments normally, you're making a total of 12 payments over the span of one year. But when you split that monthly payment in half to make biweekly payments, you're actually making 26 payments over the span of one year. And while that means you pay more money toward your mortgage each year, you save money in interest charges by paying the mortgage off quicker.

Doing the math

Let's consider an example where after your down payment, you have a $400,000 30-year mortgage with a 7% interest rate. Your monthly principal and interest payments would total $2,661.21, or $31,934.52 for the year. With biweekly payments, you'll pay $1,330.60 toward principal and interest every two weeks, or $34,595.60 each year. That allows you to pay off the loan approximately 6 years quicker than with monthly payments, saving you around $134,216 in interest payments.

Opt for a loan with fewer fees

The mortgage application process comes with a number of fees that can make borrowing money more expensive. If possible, you may consider lenders that eliminate some of these charges so you can keep more of your money for other important costs, like renovations or making extra mortgage payments.

Ally Bank is one lender that doesn't charge application fees, origination fees, processing fees or underwriting fees. Because of this, CNBC Select names it one of the best mortgage lenders on the market.

Ally Home

  • Annual Percentage Rate (APR)

    Apply online for personalized rates; fixed-rate and adjustable-rate mortgages included

  • Types of loans

    Conventional loans, HomeReady loan and Jumbo loans

  • Terms

    15 – 30 years

  • Credit needed

    620

  • Minimum down payment

    3% if moving forward with a HomeReady loan

Terms apply.

Refinance your loan for a lower interest rate

When you refinance, it means you're taking on a brand new loan for your home, often (though not always) for the remainder that you owe. Hopefully, you get a loan with better terms, such as a lower interest rate that saves you money over the life of your loan.

Of course, your new rate can depend on many factors, like current mortgage rates, how much equity you have in the house and what your credit score is when you apply. Many lenders, like Rocket Mortgage and Better.com, can be used to apply for a mortgage refinance loan. Rocket Mortgage may consider applicants with slightly lower credit scores if they meet other eligibility criteria (keep in mind that a lower credit score may not qualify you for the absolute lowest interest rates). Better.com has a convenient application process that's entirely online.

Rocket Mortgage Refinance

  • Annual Percentage Rate (APR)

    Apply online for personalized rates

  • Types of loans

    Conventional loans, FHA loans, VA Interest Rate Reduction Refinance Loan (IRRRL) and jumbo loans

  • Fixed-rate Terms

    8 – 29 years

  • Adjustable-rate Terms

    Not disclosed

  • Credit needed

    580 if opting for FHA loan refinance or VA IRRRL; 620 for a conventional loan refinance

Already have a mortgage through Rocket Mortgage or looking to start one? Check out the Rocket Visa Signature Card to learn how you can earn rewards

Better.com Mortgage Refinance

  • Annual Percentage Rate (APR)

    Apply online for personalized rates

  • Types of loans

    Conventional loan, FHA loan and jumbo loan

  • Fixed-rate Terms

    15–30 years

  • Adjustable-rate Terms

    Not disclosed

  • Credit needed

    Not disclosed

Terms apply.

Of course, be aware that there are a few drawbacks to refinancing, like having to pay another set of closing costs and not getting a lower interest rate. Because of this, it's important to speak with experts who can help you decide if refinancing is the right option for you and what interest rate you're likely to receive based on market conditions and your credit score.

Bottom line

Understanding mortgage amortization lets you make better decisions about how to manage your monthly payments. To get a breakdown of your mortgage amortization, you can ask your lender for a copy of your schedule. And if saving money is your goal with your amortization schedule, you can speak to a financial professional about the options that make the most sense for you.

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Editorial Note: Opinions, analyses, reviews or recommendations expressed in this article are those of the Select editorial staff’s alone, and have not been reviewed, approved or otherwise endorsed by any third party.
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