Mortgage Amortization Strategies

For many people, buying a home is the largest single financial investment they will ever make. Because of the hefty price tag, most people usually need a mortgage. A mortgage is a type of amortized loan by which the debt is repaid in regular installments over a specified period of time. The amortization period refers to the length of time, in years, that a borrower chooses to spend paying off a mortgage.

Though the most popular type is the 30-year fixed-rate mortgage, buyers have other options, including 15-year mortgages. The amortization period affects not only how long it will take to repay the loan, but how much interest will be paid over the life of the mortgage. Longer amortization periods typically involve smaller monthly payments and higher total interest costs over the life of the loan.

Shorter amortization periods, on the other hand, generally entail larger monthly payments and lower total interest costs. It's a good idea for anyone in the market for a mortgage to consider the various amortization options to find one that provides the best fit concerning manageability and potential savings. Here, we take a look at different mortgage amortization strategies for today's homebuyers.

Key Takeaways

  • Choosing the period over which you should pay off your mortgage is a tradeoff between lower monthly payments versus lower overall cost.
  • The maturity of a mortgage loan follows an amortization schedule that keeps monthly payments equal while modifying the relative amount of principal versus interest in each payment.
  • The longer the amortization schedule (say 30 years), the more affordable the monthly payments, but at the same time, the more interest to pay over the life of the loan.

Amortization Schedules

The exact amount of principal and interest that make up each payment is shown in the mortgage amortization schedule (or amortization table). Early on, more of each monthly payment goes toward interest. Interest on a mortgage is tax-deductible. If you are in a high tax bracket, this deduction will be of more value than for those with lower tax rates. With each subsequent payment, more and more of the payment goes to the principal, and less goes to the interest until the mortgage is paid in full and the lender files a satisfaction of mortgage with the county office or land registry office.

Longer Amortization Periods Reduce Monthly Payments

Loans with longer amortization periods require smaller monthly payments because you have more time to pay back the loan. This is a good strategy if you want payments that are more manageable.

The following table shows an abridged example of an amortization schedule for a $200,000 30-year, fixed-rate loan at a 4.5% interest rate. Shown here are the first three months of the schedule, and then a jump to 180, 240, 300, and 360 months.

Table 1: Mortgage Amortization Schedule
Month Payment Principal Paid Interest Paid Ending Balance
1 $1,013.37 $263.37 $750.00 $199,736.63
2 $1,013.37 $264.36 $749.01 $199,472.27
3 $1,013.37 $265.35 $748.02 $199,206.92
180 (15 years) $1,013.37 $516.62 $496.75 $132,467.91
240 (20 years) $1,013.37 $646.70 $366.67 $97,779.45
300 (25 years) $1,013.37 $809.53 $203.84 $54,356.57
360 (final payment) $1,013.37 $1,009.58 $3.79 $-0.00
Source: ERARE mortgage payment calculator

As you can see, the payment for this 30-year, fixed-rate 4.5% mortgage is always the same each month ($1,013.37). The amounts applied to principal and interest, however, change every month, with more money gradually shifting toward the principal and less to the interest.

Summary for the 30-year, fixed-rate 4.5% mortgage of $200,000:

  • Principal amount = $200,000
  • Monthly payment = $1,013.37
  • Total interest amount = $164,813.42
  • Total loan cost = $364,813.20

Shorter Amortization Periods Save You Money

If you choose a shorter amortization period—for example, 15 years—you will have higher monthly payments, but you will also save considerably on interest over the life of the loan, and you will own your home sooner. Also, interest rates on shorter loans are typically lower than those for longer terms. This is a good strategy if you can comfortably meet the higher monthly payments without undue hardship.

Remember, even though the amortization period is shorter, it still involves making 180 sequential payments. It's important to consider whether or not you can maintain that level of payment.

Table 2 shows what the amortization schedule looks like for the same $200,000 4.5% loan, but with a 15-year amortization (again, an abridged version for simplicity's sake). The same $200,000 4.5% loan, but with a 15-year amortization. The first three months of the amortization schedule are shown, along with payments at 60, 120, and 180 months. 

Table 2: Mortgage Amortization Schedule
Month Payment Principal Paid Interest Paid
1 $1,529.99 $799.99 $750.00
2 $1,529.99 $782.91 $747.08
3 $1,529.99 $785.85 $744.14
60 (5 years) $1,529.99 $976.38 $553.60
120 (10 years) $1,529.99 $1,222.23 $307.75
180 (final payment) $1,529.99 $1,524.27 $5.72

Summary for the 15-year, fixed-rate 4.5% loan:

  • Principal amount = $200,000
  • Monthly payment = $1,529.99
  • Total interest amount = $75,397.58
  • Total loan cost = $275,398.20

As we can see from the two scenarios, the longer, 30-year amortization results in a more affordable payment of $1,013.37, compared to $1,529.99 for the 15-year loan—a disparity of $516.62 each month. That can make a big difference for families on a tight budget or who simply want to cap monthly expenses.

The two examples also illustrate that the 15-year amortization shaves off $89,416 in interest costs. If a borrower can comfortably afford the higher monthly payments, a shorter amortization period offers considerable savings.

Accelerated Payment Options

Even with a longer amortization mortgage, it is possible to save money on interest and pay off the loan faster through accelerated amortization. This strategy involves adding extra payments to your monthly mortgage bill, potentially saving you tens of thousands of dollars and allowing you to be debt-free (at least in terms of the mortgage) years sooner.

Take the $200,000, 30-year mortgage from the above example. If an extra $100 payment were applied to the principal each month, the loan would be repaid in full in 25 years instead of 30, and the borrower would realize a $31,745 savings in interest payments. Bring that up to an extra $150 each month, and the loan would be satisfied in 23 years with a $43,204.16 savings. Even a single extra payment made each year can reduce the amount of interest and shorten the amortization, as long as the payment goes toward the principal and not the interest (make sure your lender processes the payment this way).

Naturally, you shouldn't forgo necessities or take money out of profitable investments to make extra payments. But cutting back on unnecessary expenses and putting that money toward extra payments can make good financial sense. And unlike the 15-year mortgage, it gives you the flexibility to pay less for some months.

An online mortgage-amortization calculator can help you decide which mortgage is right for you and calculate the impact of making extra mortgage payments. Additionally, mortgage calculators can determine the best interest rates available.


Other Choices

Adjustable-rate mortgages may allow you to pay even less per month than a 30-year, fixed-rate mortgage, and you may be able to adjust payments in other ways that could match an expected increase in personal income. However, monthly payments on these can rise—how often depends on economic indicators and on how the contract is written—and with mortgage interest still at almost historic lows, they are probably an unwise bet for most homeowners.

Similarly, interest-only and other types of balloon mortgages often have low payments but will leave you owing a huge balance at the end of the loan term, also a risky bet.

The Bottom Line

Deciding which mortgage you can afford should not be left solely to the lender: Even amid the current lending climate's tougher standards, you might be approved for a bigger loan than you truly need. If you like the idea of a shorter amortization period so you can pay less interest and own your house sooner—but can't afford the higher payments—consider looking for a home in a lower price range. With a smaller mortgage, you might be able to swing the higher payments that come with a shorter amortization period.

Because so many factors can affect which mortgage is best for you, it's important to evaluate your situation. If you are considering a huge mortgage and you are in a high tax bracket, for example, your mortgage deduction will likely be more favorable than if you have a small mortgage and are in a lower tax bracket. Or, if you are getting good returns on your investments, it might not make financial sense to cut back on building your portfolio to make higher mortgage payments. What always makes good financial sense is to evaluate your needs and circumstances, and take the time to determine the best mortgage amortization strategy for you.

Does Amortization Affect Mortgage Interest Rates?

No. The amortization period has nothing to do with interest rates. You choose an amortization period when you are approved for a mortgage, and decide what term mortgage you want: 30-year, 15-year, etc.  

That said, the interest rate is usually lower—by as much as a full percentage point—on shorter-term loans that amortize more quickly.

What Is the Amortization Term?

Amortization is the length of time it takes a borrower to repay a loan in full. The term is the period of time in which it’s possible to repay the loan by making regular payments. So an amortization term is the period or amount of time it'll take you to pay off the debt and own something free and clear.

People often assume that a loan’s term and its amortization are the same—that when the term is done, the amortization is also done. That’s often—but not always—true. In a balloon mortgage, for example, the loan term is shorter than the amortization: When the term ends, there's a lot of remaining principal to pay.

How Does an Amortization Schedule Work?

Often shown in table form, an amortization schedule is a complete timeline of periodic loan payments, showing the amount of principal and the amount of interest that comprise each payment until the loan is paid off at the end of its term. It also usually tracks the size of the balance. Amortization schedules demonstrate how, early in the life of the loan, the majority of each payment is what is owed in interest; later in the schedule, the majority of each payment covers the loan's principal.

Article Sources
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  1. Consumer Financial Protection Bureau. "Understand Loan Options."

  2. Internal Revenue Service. "Publication 936 (2020), Home Mortgage Interest Deduction."


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