What is a Home Loan Amortization?

Home loan amortization is the process by which the monthly payments made on a home loan pay down the principal of the loan. Fully amortizing residential mortgages are the most common type of loan in the United States. They have long maturities, often 30 years. While making the payments on the loan, the borrower is gradually purchasing his home.

The United States residential mortgage market did not always offer home loan amortization. The first mortgages were very short term; often, they had to be renewed annually. They required large down payments, often more than 50 percent. The buyer paid interest on the loan until it was time for renewal, at which point he either negotiated a refinancing or defaulted on the remaining balance on the purchase price of the home. The balloon payments that came due at the end of these short-term mortgages caused so many defaults in the 1930s that lenders began to rethink the way they structured mortgages, and the process of amortization became popular.

The level of home loan amortization depends on the specific loan agreement. Many residential mortgages are fully amortizing, which means that the scheduled payments over the life of the mortgage pay down the entire principal. The last payment is the same amount as the first, and after it is made the borrower owes no principal or interest; he owns the home.

Others are partially amortizing, which means part of the principal is paid off in the monthly payments. Though amortization is widespread, it is not a necessary feature of a mortgage. Interest-only loans have no amortization, and the entire principal is due at the end of the mortgage period in a balloon payment.

In home loan amortization, each payment, though made in one piece, has two components. Part of the payment is the interest on the loan, which is determined by multiplying the outstanding principal by the mortgage rate that is specified by the loan agreement. The remainder of the payment pays a part of the principal. The next month, the principal is lower; thus, the interest payment is lower and more of the payment can go toward the principal. The first payments are almost entirely interest, but by the end of the loan the interest payments are small and the majority of each payment goes to principal.

The lender who created a home loan can supply the borrower with an amortization schedule. This is a document which shows the progression of the home loan amortization. For each payment, it shows how much is principal and how much is interest. If you do not have a schedule, you can calculate these figures using amortization formulas or online amortization calculators.