What Is an Amortization Schedule?

One of the most important documents you’ll get when you take on a mortgage is an amortization schedule. This document is a table showing you the true cost of your property by outlining what you will be paying in principal and interest.

When you’re shopping for a loan or a refinance, you will receive this schedule as a breakdown of each payment from the first to the last. The schedule shows the amount of each payment, or how much you owe at any given time. When you make a payment, you can check the schedule to see how much you have left to pay on your loan. Your payments are calculated by dividing the principal, or the amount you owe after your down payment, by the number of months you’ll be paying off your loan. Interest is then calculated at the current rate according to the length of the loan, usually 15, 20, or 30 years.

Interest/principal breakdown
Amortization is paying off debt in regular increments of time. Each payment is split between the principal and interest, with initial payments eliminating a percentage of the interest and later payments going toward more of the principal.

Amortization schedules are used to account for compounding interest. After you make a payment, the amount of interest you’ve paid up to that point is recalculated because the payment reduced the amount of the principal.

You will pay less in interest as the amount of the principal decreases. Your early payments are mostly toward interest, while the later payments are primarily on the principal. The result is that you gain equity in your home at a slower rate in the initial years of your mortgage. The later payments will deplete the balance more quickly.

If your mortgage allows you to pay extra, you can use an amortization schedule to see how many years you can shave off your loan by paying extra toward the principal. The extra payments will result in a larger amount paid on the principal, thus reducing the interest due on future payments.

Considering a refinance
An amortization schedule also is helpful if you are considering refinancing your mortgage. The amount you owe, your interest rate, and how long you plan to own the home all play a role in determining whether or not refinancing is a cost-effective option. You will need to balance the cost of refinancing, which will include closing costs, against what you’ll save in the long term.

Typically, reducing the interest rate by 1% may be worthwhile, while reducing it by 2% is almost always worth doing.

The amortization schedule is a handy document you should refer to anytime you’re considering making extra payments or refinancing your loan.