Amortization is the process of spreading out a loan balance into a series of scheduled debts. Any loan that is fixed, which means that the total balance is not being increased and the interest rate isn’t changing, can easily be amortized. If you have an adjustable rate mortgage, you can still get an amortization schedule; just be aware that it will change and you’ll need to stay on top of it.
How to Read Your Amortization Schedule
If you’re looking at the documentation that came with your first mortgage, you may have noticed an amortization schedule. One of the shocking things you may find when you read this schedule is that your early mortgage payments really don’t move the needle on your principal. The early years of your mortgage will include paying much more in interest than in principal.
Any time you add to the total principal, you reset the amortization schedule and will likely have a different interest rate. If you’re looking at your mortgage schedule right now and are considering a refinance, the reset on the interest you’ll have to pay on this new loan may push you in another direction.
How the Term of the Loan Impacts Your Amortization Schedule
The total term of your loan will have an impact on the amount of interest you have to pay. When looking at a mortgage, it’s a good idea to review the amortization on a 30 year mortgage vs. a 15 year mortgage.
Extending the term of the loan can greatly increase the amount of interest you have to pay over the life of the loan. A 30 year mortgage will have a smaller payment than a 15 year mortgage, but the total interest you’ll pay over the life of the loan will be markedly higher. If you can save interest by budgeting a bit more toward your mortgage payment for 15 years, you can gain a great financial benefit.
Another way to lower the total interest you need to pay on your mortgage is to make a small, partial payment towards the principal each month. If you currently have a 30 year mortgage and a very low interest rate, refinancing to a 15 year mortgage may result in a much higher interest rate. Instead, stick with the loan that you have and do your best to make an extra mortgage payment each year. Split the total payment by 12 and send in that extra payment each month if needed.
Credit Card Amortization
Interestingly, the remarkably high interest rate on credit cards doesn’t actually stack the interest higher than the principal in terms of amortization. If you can only make the minimum payment, you’ll still be putting a bit more money towards the principal than the interest each month.
Here are the problems you’ll face when trying to get on top of credit card debt:
- Exorbitant interest rates will rapidly add to your total debt
- If you don’t stop using the card, the total debt will become unmanageable
- If you miss a payment or can’t make the minimum, your interest rate can go up
As costs go up and more people are using credit cards and carrying a balance, the rising interest rates on credit cards will continue to be a challenge for most household budgets. In 2019, the average interest rate on cards that cardholders carried a balance on was just under 17%; as of 2024, that interest rate was more than 22%.
Each credit card statement that shows that you are carrying a balance will include at least a truncated amortization report. The statement will show you that if you only pay the minimum payment each month, it will take you XX years to pay off the debt. This statement may or may not include the amount of interest you’ll have to pay over the course of that debt pay-off.
Credit card interest is obviously higher than a mortgage because it’s what is referred to as unsecured debt; if you don’t pay the loan, the lender can’t repossess what you bought. Your mortgage holder can take your house and your car lender can repossess your; your credit card company can’t take back your vacation.
That being said, paying attention to credit card amortization is incredibly important if getting out of debt is your goal. If you can’t pay extra toward your credit card, do your very best to stop using it. Put a personally imposed cap on the total debt on the card so payments you make in the future will slowly whittle down that interest over time.
Auto Loan Amortization
In terms of principal vs. interest, your auto loan is actually the most efficient debt. Car loans are secured debt. The loan term is obviously lower than your home loan; your car will probably not last as long as your house. The majority of your payment will go towards the principal on your car from your first payment.
The interest rate on your car loan will obviously have an impact on the percentage of your payment that can’t be used on the principal. However, if your goal is to get out of debt and you want to consider both amortization rate and interest rate to budget out your goals, your car loan may not be the best place to put your extra money.
How to Use Amortization Information to Better Manage Your Money
One of the biggest wastes of your debt-paying dollar is late fees and penalties. After that, paying excess interest is high on the list of wasteful expenses! If you have the extra cash to make an extra mortgage payment over the course of a year, it will pay off over time. If your total credit card balance is high, tackle those first. In terms of amortization and financial efficiency, your car loan will save you the least interest.
Amortization is the process of spreading out a loan balance into a series of scheduled debts. Any loan that is fixed, which means that the total balance is not being increased and the interest rate isn’t changing, can easily be amortized. If you have an adjustable rate mortgage, you can still get an amortization schedule; just be aware that it will change and you’ll need to stay on top of it.
How to Read Your Amortization Schedule
If you’re looking at the documentation that came with your first mortgage, you may have noticed an amortization schedule. One of the shocking things you may find when you read this schedule is that your early mortgage payments really don’t move the needle on your principal. The early years of your mortgage will include paying much more in interest than in principal.
Any time you add to the total principal, you reset the amortization schedule and will likely have a different interest rate. If you’re looking at your mortgage schedule right now and are considering a refinance, the reset on the interest you’ll have to pay on this new loan may push you in another direction.
How the Term of the Loan Impacts Your Amortization Schedule
The total term of your loan will have an impact on the amount of interest you have to pay. When looking at a mortgage, it’s a good idea to review the amortization on a 30 year mortgage vs. a 15 year mortgage.
Extending the term of the loan can greatly increase the amount of interest you have to pay over the life of the loan. A 30 year mortgage will have a smaller payment than a 15 year mortgage, but the total interest you’ll pay over the life of the loan will be markedly higher. If you can save interest by budgeting a bit more toward your mortgage payment for 15 years, you can gain a great financial benefit.
Another way to lower the total interest you need to pay on your mortgage is to make a small, partial payment towards the principal each month. If you currently have a 30 year mortgage and a very low interest rate, refinancing to a 15 year mortgage may result in a much higher interest rate. Instead, stick with the loan that you have and do your best to make an extra mortgage payment each year. Split the total payment by 12 and send in that extra payment each month if needed.
Credit Card Amortization
Interestingly, the remarkably high interest rate on credit cards doesn’t actually stack the interest higher than the principal in terms of amortization. If you can only make the minimum payment, you’ll still be putting a bit more money towards the principal than the interest each month.
Here are the problems you’ll face when trying to get on top of credit card debt:
- Exorbitant interest rates will rapidly add to your total debt
- If you don’t stop using the card, the total debt will become unmanageable
- If you miss a payment or can’t make the minimum, your interest rate can go up
As costs go up and more people are using credit cards and carrying a balance, the rising interest rates on credit cards will continue to be a challenge for most household budgets. In 2019, the average interest rate on cards that cardholders carried a balance on was just under 17%; as of 2024, that interest rate was more than 22%.
Each credit card statement that shows that you are carrying a balance will include at least a truncated amortization report. The statement will show you that if you only pay the minimum payment each month, it will take you XX years to pay off the debt. This statement may or may not include the amount of interest you’ll have to pay over the course of that debt pay-off.
Credit card interest is obviously higher than a mortgage because it’s what is referred to as unsecured debt; if you don’t pay the loan, the lender can’t repossess what you bought. Your mortgage holder can take your house and your car lender can repossess your; your credit card company can’t take back your vacation.
That being said, paying attention to credit card amortization is incredibly important if getting out of debt is your goal. If you can’t pay extra toward your credit card, do your very best to stop using it. Put a personally imposed cap on the total debt on the card so payments you make in the future will slowly whittle down that interest over time.
Auto Loan Amortization
In terms of principal vs. interest, your auto loan is actually the most efficient debt. Car loans are secured debt. The loan term is obviously lower than your home loan; your car will probably not last as long as your house. The majority of your payment will go towards the principal on your car from your first payment.
The interest rate on your car loan will obviously have an impact on the percentage of your payment that can’t be used on the principal. However, if your goal is to get out of debt and you want to consider both amortization rate and interest rate to budget out your goals, your car loan may not be the best place to put your extra money.
How to Use Amortization Information to Better Manage Your Money
One of the biggest wastes of your debt-paying dollar is late fees and penalties. After that, paying excess interest is high on the list of wasteful expenses! If you have the extra cash to make an extra mortgage payment over the course of a year, it will pay off over time. If your total credit card balance is high, tackle those first. In terms of amortization and financial efficiency, your car loan will save you the least interest.
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