What happens when you make a payment on your mortgage? When a mortgage is made over a specified term, 30 years in this case/example, monthly mortgage payments are applied to both the loan principle and the interest on the loan. How the payment schedule is determined and how much of the payment gets applied to principle and interest is considered amortization. Both principle and interest balances are always changing throughout the life of the loan. With most 30-year fixed rate mortgages, your monthly payments for the first few years are applied more to the interest on the loan, than paying down the principle. As you continue to receive your mortgage statements, it will seem as though your principle is barley being reduced during the first few years, because such a small amount of your monthly payments are applied toward paying down the principle amount due. However, as time continues to pass by and you continue to make monthly payments, eventually, more and more of each payment will be applied to pay down the principle, instead of the interest.
Provided below, there is an amortization schedule for a typical 30-year fixed-rate mortgage.
Principle Loan Amount: $200,000.00
Interest Rate: 7%
Total Monthly Payment: $1,330.60
To summarize, as the years go by, the principle amount owed on the original mortgage loan is paid down more and more. With some loans and mortgages, you can make extra payments that get applied to the principle, which ends up reducing the total loan amount even faster. Simply put, upon making each monthly mortgage payment, equity increases.