On home loan payments, the first portion of the amortization schedule is typically interest-heavy, which means that a larger portion of the monthly payment goes towards paying off the accrued interest. With each subsequent payment, the interest decreases and the amount that contributes to the homeowner's equity (the principal amount) will increase.
Let's take the example of a $300,000 home, purchased with a 5% downpayment and amortized over 25 years with a 2.3% interest rate. In this case, let's imagine that the homeowner has opted for a fixed rate loan, in which the total amount paid each month is constant over 25 years.
- The amortization period is 25 years.
- In the first year, this homeowner will pay a total of $15,609 in mortgage loan charges. Of this amount, $8,798 will contribute to principal payments, and $6,811 will contribute to interest payments. The balance left on the loan at the end of the year will be $286,462
- In the tenth year, the total annual payment will also be $15,609. Of this amount, $10,856 will contribute to the principal amount and $4,752 will contribute to the accrued interest. The outstanding balance will be $197,311.
- In the last year (year 25), the annual payment will be $15,609. Of this amount, $15,413 will contribute to the principal while only $196 will be paid in interest charges. By the end of the year, the loan will be 100% paid off.
As illustrated by the example, most amortization schedules will have principal payments that gradually increase over time, and interest payments that gradually decrease.
Our mortgage calculator offers a useful tool for visualizing amortization schedules with any given loan amount, interest rate, and amortization period.