Amortized Mortgage

What Is an Amortized Mortgage?

An amortized mortgage is a type of loan that’s designed to be paid off in full in equal installments over the life of the loan. Even though you’re paying equal installments each month, the amount you’re paying toward the principal and interest varies from month to month.

Whether you have a 15-year mortgage or a 30-year mortgage, your monthly payment won’t change throughout the life of your loan. A longer amortization schedule will result in lower monthly payments, but that comes at the cost of paying more interest over the life of the loan.

How Does Amortized Mortgage Relate to Hard Money Loans?

Mortgages are traditionally amortized while hard money loans aren’t. If you’re a homebuyer applying for a traditional mortgage through your bank, your loan is probably going to be amortized. When you make payments on an amortized loan, you’re paying toward the interest and principal to repay the loan in full by the end of the 15-year or 30-year loan period.

If you’re looking for a short-term hard money loan, you may have to make a balloon payment at the end of your loan period. This means that in addition to making monthly interest payments on your loan, you’ll also have to make a lump-sum payment at the end of your loan.

How Amortized Mortgage Works

Looking at an amortization table can help you understand how the amortization process works. In this section, we’ll look at a step-by-step breakdown of how the amortization process works and what you’ll find when you look at your amortization table.

Step-by-Step Breakdown

When a mortgage is amortized, your monthly payment will be the same for the life of the loan. However, the amount you pay toward the principal and interest will change over time. Let’s take a closer look at how that works.

Step 1:

Before you sign your mortgage agreement, you’ll see your loan amount, interest rate, and monthly payment amount.

Step 2:

Once you sign your mortgage agreement, you’ll start making monthly payments toward the principal and interest of the loan.

Step 3:

Initially, most of your monthly payment will go toward interest with a small percentage going toward the principal.

Step 4:

Each month, the amount you’re paying toward the principal will increase while the amount you’re paying toward interest will decrease.

Step 5:

Every monthly payment will remain the same until your loan is paid off. However, payments closer to the end of your loan will mostly go toward the principal.

Real‑World Scenarios

Looking at a few simple examples of mortgages can help you get a better understanding of amortized mortgages. Traditional mortgages usually have a 15-year or 30-year loan period, so we’ll break down how both types of loans work.

15-Year Mortgage

If you want to minimize the total interest you’re paying and you don’t mind higher monthly payments, 15-year mortgages are ideal.

In this example, we’ll look at a 15-year loan for $200,000. If your monthly payment is $1,687.71, $1,000 of your first payment would go toward interest and $687.71 toward the principal. Your remaining principal after that first payment would be $199,312,29.

By year five, your monthly payments will be almost evenly split between the principal and interest. In the first month of year five, $813.98 would go toward interest and $873.73 would go toward the principal. The remaining principal would be $161,922.45.

The amount you’re paying toward interest continues to decrease until, in the 15th year, you’re paying less than $100 toward interest each month. At the end of this amortization schedule, your loan will be fully repaid.

Benefits and Considerations

It’s important to understand the pros and cons of various types of loans before you make any financial decisions. Check out some of these amortized mortgage benefits and considerations before applying for a loan.

Advantages

Amortized mortgages are simple because your monthly payment is the same for the duration of the loan. You can confidently plan ahead knowing your monthly payment won’t change and your mortgage will be paid off on time.

Compared to short-term loans, amortized mortgages also give you more time to repay your loan. For first-time homebuyers, this can be a huge benefit.

Drawbacks

One of the biggest drawbacks to an amortized mortgage is the amount of interest you’re paying over the life of the loan. It takes years before the majority of your monthly payment is applied to the principal, and you still have to pay interest until your loan is paid off.

Getting approved for an amortized mortgage can also be more difficult due to credit score and income requirements.

Amortized Mortgage FAQs

What is a fully amortized mortgage?

A fully amortized mortgage is a mortgage that’s split into equal monthly payments over the duration of the loan. Each payment is split — not necessarily equally — between the principal and interest.

Are all mortgages amortized?

While most traditional mortgages are amortized, that’s not always the case. Some mortgages, including balloon and interest-only mortgages, aren’t amortized.

Can you do a 40-year amortization?

15-year and 30-year mortgages are the most common, but 40-year amortization may be an option in some cases. If you’re looking to minimize your monthly payment to purchase a home, you might consider a 40-year amortization. It’s important to keep in mind that you’ll pay more total interest with a 40-year loan.

Is an amortized loan good or bad?

Amortized loans aren’t necessarily good or bad. If you want a long-term loan with stable monthly payments, that’s what amortized loans offer. If you’re looking for a short-term loan as an investor, you might be a better candidate for another type of loan.

What are the disadvantages of a 30-year mortgage?

The biggest disadvantage of a 30-year mortgage compared to a 15-year mortgage is the total interest you pay. While 30-year mortgages have lower monthly payments, you pay less total interest with a 15-year mortgage.

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