If you’re a homeowner, you probably received an amortization schedule during the closing process, but have you looked at it since then? The chart actually has some information about your mortgage that can be very useful.
In fact, I was inspired to pay off my mortgage faster after reviewing an amortization table for the first time.
This simple chart can help you pay off your mortgage faster
What exactly is an amortization schedule? It’s a document that covers the life of the loan and lists every single payment, breaking down principal and interest. That was the real eye-opener for me.
The principal is the money that you originally agreed to pay back, and interest is the cost of borrowing the principal.
Let’s go over an example: The amortization schedule below is for a 30-year fixed-rate mortgage with a 4.125% interest rate and an original loan amount of $185,000.
Take a look at the first $895 monthly payment: $635 goes toward interest and only $260 toward the principal. This amortization schedule shows how those first payments barely make a dent in the balance.
But by the very last payment of the 30-year loan, $894 goes toward the principal and only $3 toward interest.
First 12 payments
Last 12 payments
Here’s a column-by-column explanation of the information you’ll find on an amortization schedule:
- Payment number: For a 30-year loan, there are 360 monthly payments. The first column simply lists the order of payments chronologically.
- Payment date: Next to the payment number is the payment date. Pretty self-explanatory.
- Interest rate: If you have a fixed-rate mortgage, your interest rate never changes. With an adjustable-rate mortgage (ARM), your interest rate can go up or down periodically.
- Payment amount: With a fixed-rate mortgage, the payment amount also remains the same.
- Principal: This is where things get interesting! The amount of your monthly payment that's applied to the principal will be low during the first few years of your loan and will gradually increase over time.
- Interest: The portion of your payment that goes toward interest starts high and decreases as time goes by.
- Mortgage insurance: If you bought a home with a down payment of less than 20%, private mortgage insurance (PMI) is required. It can be removed once you have 20% equity in your home.
- Balance: This column shows the remaining balance after each payment is made.
- Loan-to-value ratio: The loan-to-value ratio (LTV ratio) on the amortization schedule reflects the outstanding loan balance divided by the purchase price. It decreases with every payment.
An amortization schedule doesn’t take into account any extra payments. When I first looked at my table, I was determined to apply additional money to the principal so that I could reduce the interest I paid in the long run.
If the borrower from our example made an extra $100 principal payment every month, here’s what would happen:
According to the Bankrate.com calculator, the additional principal payment of $100 per month saves $27,594 in interest and shortens the term of the mortgage by five years!
Important note: Check with your loan provider to make sure that there are no prepayment penalties.
When I was paying off my own mortgage, I used calculators like the one from Bankrate and referred back to an online amortization schedule to see the progress I was making in trimming years off my loan.
Clark Howard’s key takeaway
"Every homeowner with a mortgage should print out an amortization schedule to track the exact progress of their mortgage. They're free and easy to find online. Loans are sold a lot and routinely the balances are messed up when the loan is sold. If you're someone who's interested in prepaying on your mortgage, an amortization schedule gives you the ability to make sure your prepayments are properly applied and reflected in your new remaining balance. In addition, homebuyers who have PMI because they put down less than 20% can use the schedule to know when they can remove the PMI."
More Clark.com stories you may like:
- How I paid off my $86,000 mortgage in 2 years
- Is a biweekly mortgage plan a good idea?
- Buying a home? Here are 9 costly mortgage mistakes to avoid