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U.S. Mortgage Market Statistics: 2018

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

Homeownership rates in the United States have increased steadily since the height of the 2007-2010 housing crisis. Despite this, increasing interest rates and high home prices have kept the homeownership rate much lower throughout 2018 than it was during the era before the crisis.

Housing prices have recently begun to cool, however, which may create opportunities for some would-be buyers to be able to afford a home. But this does not mean that the homeownership rate will approach its previous peak levels anytime soon. Nonetheless, the overall housing market is in a healthy state, with very low levels of distressed loans.

Throughout this piece, we dig into a broad range of housing metrics to help paint a picture of the current state of the housing market, explain who gets home financing, how mortgages are structured and how Americans are managing our debt.

Summary:

  • Total mortgage debt: $10.3 trillion1
  • Average mortgage balance: $148,0602
  • Average new mortgage balance: $260,3863
  • Homeownership rate (share of owner-occupied homes): 64.4%4
  • Homeowners with a mortgage: 63%5
  • Median credit score for a new mortgage: 7586
  • Average down payment required: $28,9327
  • Mortgages originated in 2017: $1.75 trillion8
  • Share of mortgages originated by banks: 40%9
  • Share of mortgages originated by credit unions: 9%9
  • Share of mortgages originated by nonbank lenders: 51%9
  • Share of mortgages with a delinquency rate of 30 days or more: 3%20

Key insights:

  • While credit score requirements are still more lax than they were in 2012, the median credit score for a new mortgage in 2017 was 758, four points higher than it was in 20166
  • 3% of mortgages on single family homes are in delinquency, or at least 30 days past due. In 2010, mortgage delinquency reached 11.54%20

Homeownership and equity levels

In the second quarter of 2017, real estate values in the United States surpassed their pre-housing-crisis levels. As of the third quarter of 2018, the total value of real estate owned by individuals in the United States is nearly $25.6 trillion19, and total mortgages clock in at $10.3 trillion.1 This means that Americans have $15.2 trillion in home equity.12 This is the highest value of home equity Americans have ever seen.

However, real estate wealth is becoming increasingly concentrated as overall homeownership rates fall. In 2004, 69% of all Americans owned homes. Today, that number is down to 64.4%.4 While home affordability remains a question for many Americans, the downward trend in homeownership also corresponds to banks’ tighter credit standards following the Great Recession.

New mortgage originations

Mortgage origination levels have recovered from their housing crisis lows. In 2008, financial institutions issued just $1.4 trillion of new mortgages. In 2016, new first lien mortgages topped $2 trillion for the first time since the end of the housing crisis, but mortgage originations were still 25% lower than their pre-recession average.8 New first lien mortgages fell to $1.8 trillion in 2017. Through the second quarter of 2018, banks originated just $820 billion in new mortgages, which is $20 billion lower than it was at the same point in 2017.

As recently as 2010, three banks (Wells Fargo, Bank of America and Chase) originated 56% of all mortgages.13 But in 2017, Wells Fargo, Bank of America and Chase and all banks put together originated just 40% of all loans.9

“Nonbank” lending, both credit unions and nondepository lenders have continued to cut into banks’ share of the mortgage market. In 2017, credit unions issued 9% of all mortgages. Additionally, 51% of all mortgages in 2017 came from non-depository lending institutions like Quicken Loans and PennyMac. Behind Wells Fargo ($212 billion) and Chase ($108 billion), Quicken ($86 billion) was the third-largest mortgage issuer in 2017. In the fourth quarter of 2017, PennyMac issued $17 billion in loans and was the fifth largest lender overall.9

Government vs. private securitization

Banks tend to be more willing to issue new mortgages if a third party will buy the mortgage in the secondary market. This is a process called loan securitization. Consumers can’t directly influence which entity buys their mortgage, but mortgage securitization influences who gets mortgages and their rates.

Government-sponsored enterprises (GSEs) have traditionally played an important role in ensuring banks will issue new mortgages. Through the second quarter of 2018, GSEs Fannie Mae and Freddie Mac purchased 44% of all newly issued mortgages, down from 46% in the second quarter of 2017.8

Through the second quarter of 2018, private securitization companies purchased only 2% of all loans, notably higher than the .6% purchased in 2017.8 Prior to 2007, private securitization companies held $1.6 trillion in subprime and Alt-A (near prime) mortgages. In 2005 alone, private securitization companies purchased $1.1 trillion worth of mortgages. Today, private securitization companies hold just $438 billion in total assets, including $361 billion in subprime and Alt-A loans.14

As private securitization firms exited the mortgage landscape, programs from the Federal Housing Administration (FHA) and U.S. Department of Veterans Affairs (VA) have filled in some of the gap. The FHA and VA are designed to help borrowers get loans despite having smaller down payments or lower incomes. FHA and VA loans accounted for 23% of all loans issued in 2017, and 22% in the first half of 2018.8. These loan programs are the only mortgages that grew in absolute terms from the pre-mortgage crisis. From 2001 through 2007, FHA and VA loans only accounted for an average $138 billion in loans per year. In 2017, FHA and VA loans accounted for $441 billion in loans issued.8 In 2017, 24% of all first lien mortgages were financed through FHA or VA programs.

Portfolio loans — mortgages held by banks — accounted for $524 billion in new mortgages in 2017. Despite tripling in volume from their 2009 low, portfolio loans remain down 29% from their pre-crisis average.8

Mortgage credit characteristics

As of 2017, banks have issued 31% fewer mortgages compared with a pre-crisis average between 2001 and 2007. This means that borrowers need better credit in order to get a mortgage. 8

The median FICO score for an originated mortgage rose from 707 in late 2006 to 758 in November 2018. 11

Despite the dramatic credit requirement increases from 2006 to today, banks are starting to relax lending standards somewhat. In the first quarter of 2012, the median borrower had a credit score of 781, 23 points higher than the median borrower in November 2018.11

From the third quarter of 2001 through the end of 2008, an average of 20% of all mortgages originated went to people with subprime credit scores (lower than 660). In the third quarter of 2018, subprime borrowers received just 9% of all mortgages.

Meanwhile, the share of mortgages issued to borrowers people with excellent credit (scores above 760) doubled. Between the third quarter of 2001 and the end 2008, just 28% of all mortgages went to people with excellent credit. In the third quarter of 2018, 57% of all mortgages went to people with excellent credit.6

Although banks tightened lending standards related to maximum debt-to-income (DTI) ratios for their mortgages in response to the market crash of 2008, they have recently begun to show signs of loosening those standards. For example, the average DTI ratio in 2017, 35.1%, was more than one point higher than the average DTI ratio in 2016, 34.0%. Nonetheless, the average DTI ratio is still lower than it was in 2007 where it was 38.4%.

LTV and delinquency trends

Banks continue to screen customers on the basis of credit score and income, but customers who take on mortgages are taking on bigger loans than ever before. Today, a new mortgage has an average unpaid balance of approximately $260,000 according to data from the Consumer Financial Protection Bureau.3

The primary drivers behind larger loans are higher home prices, but lower down payments also play a role. Prior to the housing crisis, more than half of all borrowers put down at least 20%. The average loan-to-value ratio at loan origination was 82%.10

In 2018, the average loan-to-value ratio at origination has fallen to 86% from 87% in 2017.10

As of November, 2018, the average loan-to-value ratio across all homes in the United States is an estimated 40%. The average LTV on mortgaged homes is 63%.16 This is substantially higher than the pre-recession LTV ratio of approximately 60%. Between 2009 and 2011, more than a quarter of all mortgaged homes had negative equity. Today, just 4.2% of mortgaged homes have negative equity.17

Americans continue to manage mortgage debt well. Current homeowners have mortgage payments that make up an average of just 15.1% of their annual household income.18

In quarter three of 2018, mortgage delinquency rates were 3.0%. This low delinquency rate is well below the 2010 high of 11.5% delinquency.20

Today, delinquency rates on mortgages fully returned to their pre-crisis lows, and can be expected to stay low until the next economic recession.

Mortgage debt service payments as a percentage of disposable personal income have fallen to their lowest levels since 1980, when the data was first recorded.

Sources:

  1. Board of Governors of the Federal Reserve System (U.S.), Households and Nonprofit Organizations; Home Mortgages; Liability, Level [HHMSDODNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HHMSDODNS Dec. 18, 2018.
  2. Survey of Consumer Expectations Housing Survey – 2018,” Credit Quality and Inclusion, from the Federal Reserve Bank of New York. Accessed Nov. 28, 2018.
  3. Home Mortgage Disclosure Act, Consumer Financial Protection Bureau, “ Average Loan Amount, 1-4 family dwelling, 2017.” Accessed Nov. 19, 2018.
  4. U.S. Census, Homeownership Rate for the United States [USHOWN], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/RHORUSQ156N, Nov. 19, 2018. (Calculated as percentage of all housing units occupied by an owner occupant.)
  5. “U.S. Census Bureau, 2017 American Community Survey 1-Year Estimates,” Mortgage Status, Owner-Occupied Housing Units. Accessed Nov. 19, 2018.
  6. Quarterly Report on Household Debt and Credit August 2017.” Credit Score at Origination: Mortgages, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed Nov.19, 2018.
  7. Calculated metric:
    1. Down Payment Value = Home Price* Average Down Payment Amount (Average Unpaid Balance on a New Mortgageb / Median LTV on a New Loanc) * (1 – Median LTV on a New Loanc)
    2. Home Mortgage Disclosure Act, Consumer Financial Protection Bureau, “ Average Loan Amount, 1-4 family dwelling, 2017.” Accessed Nov. 19, 2018. Gives an average unpaid principal balance on a new loan = $260,386
    3. Housing Finance at a Glance: A Monthly Chartbook, October 2018.” Page 17, Median Combined LTV at Origination from the Urban Institute, Urban Institute, calculated from: Corelogic, eMBS, HMDA, SIFMA, and Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  8. Housing Finance at a Glance: A Monthly Chartbook, October 2018.” Page 8, First Lien Origination Volume from the Urban Institute. Source: Inside Mortgage Finance and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff.
  9. Mortgage Daily. 2018. “Mortgage Daily 2017 Biggest Lender Ranking” [Press Release] Retrieved from https://globenewswire.com/news-release/2018/03/26/1453033/0/en/Mortgage-Daily-2017-Biggest-Lender-Ranking.html.
  10. Housing Finance at a Glance: A Monthly Chartbook, October 2018.” Combined LTV at Origination from the Urban Institute, Urban Institute, calculated from: Corelogic, eMBS, HMDA, SIFMA, and Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff. Accessed Nov. 26, 2018.
  11. Quarterly Report on Household Debt and Credit November 2018.” Mortgage Delinquency Rates, from the Federal Reserve Bank of New York and Equifax Consumer Credit Panel. Accessed Nov. 28, 2018. A breakdown of data can be found here: https://www.newyorkfed.org/microeconomics/hhdc/background.html
  12. Calculated metric: Value of U.S. Real Estate – Mortgage Debt Held by Individuals
    1. Board of Governors of the Federal Reserve System (U.S.), Households; Owner-Occupied Real Estate including Vacant Land and Mobile Homes at Market Value [HOOREVLMHMV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HOOREVLMHMV, Nov 28, 2018.
  13. Mortgage Daily, 2017. “3 Biggest Lenders Close over Half of U.S. Mortgages” [Press Release]. Retrieved from http://www.mortgagedaily.com/PressRelease021511.asp?spcode=chronicle.
  14. Housing Finance at a Glance: A Monthly Chartbook, October 2018” Size of the US Residential Mortgage Market, Page 6 and Private Label Securities by Product Type, Page 7, from the Urban Institute Private Label Securities by Product Type, Urban Institute, calculated from: Corelogic and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff. Accessed Nov. 28, 2018
  15. ““Fannie Mae Statistical Summary Tables: October 2018” from Fannie Mae. Accessed Nov. 29, 2018; and “ Single Family Loan-Level Dataset Summary Statistics” from Freddie Mac. Accessed Nov. 28, 2018. Combined debt-to-income ratios weighted using original unpaid balance from both datasets.
  16. Calculated metrics:
    1. Mortgages Houses LTV = Value of All Mortgages / (Value of All Homes – Value of Homes with No Mortgagee)
    2. Board of Governors of the Federal Reserve System (U.S.), Households; Owner-Occupied Real Estate including Vacant Land and Mobile Homes at Market Value [HOOREVLMHMV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HOOREVLMHMV, Nov. 28, 2018.
    3. Board of Governors of the Federal Reserve System (U.S.), Households and Nonprofit Organizations; Home Mortgages; Liability, Level [HHMSDODNS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HHMSDODNS, Nov. 28, 2018.
    4. U.S. Census Bureau, 2011-2015 American Community Survey 5-Year Estimates, Aggregate Value (Dollars) by Mortgage Status, Nov. 28, 2018.
  17. Housing Finance at a Glance: A Monthly Chartbook, October 2018.” Negative Equity Share, Page 22. Source: CoreLogic and the Urban Institute. Data provided by Urban Institute Housing Finance Policy Center Staff. Accessed Nov. 28, 2018
  18. Survey of Consumer Expectations Housing Survey – 2018,” Credit Quality and Inclusion, from the Federal Reserve Bank of New York. Accessed Nov. 28, 2018.
  19. Board of Governors of the Federal Reserve System (U.S.), Households; Owner-Occupied Real Estate including Vacant Land and Mobile Homes at Market Value [HOOREVLMHMV], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/HHMSDODNS Dec. 12, 2018.
  20. Board of Governors of the Federal Reserve System (U.S.), Delinquency Rate on Single-Family Residential Mortgages, Booked in Domestic Offices, All Commercial Banks [DRSFRMACBS], retrieved from FRED, Federal Reserve Bank of St. Louis; https://fred.stlouisfed.org/series/DRSFRMACBS Dec. 12, 2018.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Tendayi Kapfidze
Tendayi Kapfidze |

Tendayi Kapfidze is a writer at MagnifyMoney. You can email Tendayi here

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Mortgage

Should You Save for Retirement or Pay Down Your Mortgage?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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On the list of financial priorities, which comes first — paying off your mortgage or saving for retirement? The answer isn’t simple. On one hand, owning a home with no mortgage attached to it provides long term security knowing you’ll have a place to live with no monthly payment except property taxes and insurance. However, you’ll also need income to live on if you plan to retire, and how much you save now will have a big impact on your quality of retirement life.

We’ll discuss the pros and cons of whether you should save for retirement or pay down your mortgage, or maybe a combination of both.

Pros of paying down your mortgage vs. saving for retirement

The faster you pay your mortgage off, the sooner you own the home outright. However, there are other benefits you’ll realize if you take extra measures to pay your loan balance off faster.

You could save thousands in long-term interest charges

Most homeowners take out a 30-year mortgage to keep their monthly payments as low as possible. The price for that affordable payment is a big bill for interest charged over the 360 payments you’ll make if you’re in your “forever” home.

For example, a 30-year fixed $200,000 loan at 4.375% comes with a lifetime interest charge of $159,485.39. That’s if you never pay a penny more than your fixed mortgage payment for that 30-year period. Using additional funds to pay down your mortgage faster can significantly reduce this.

Even one extra payment a year results in $27,216.79 in interest savings on the loan we mentioned above. An added bonus is that you’ll be able to throw your mortgage-free party four years and five months sooner.

You’ll build equity much faster

Thanks to a beautiful thing called amortization, lenders make sure the majority of your monthly mortgage payment goes toward interest rather than principal in the beginning of your loan term. Because of that, it’s difficult to make a real dent in your loan principal for many years. You can, however, counteract this by making additional payments on your mortgage and telling the lender to specifically put those payments toward your principal balance instead of interest.

Not only do you pay less interest over the long haul with this strategy, but you build the amount of equity you have in your home much faster. And to homeowners, equity is gold — you’re closer to owning your home outright, and equity can also be a resource if you need funds for a home improvement project or another big expense.

You can access that equity as your financial needs change by doing a cash-out refinance or by taking out a home equity loan or home equity line of credit (HEL or HELOC).

You won’t lose your home if values drop

When you contribute extra money into a retirement account, there is always the risk that you’ll lose some or all of the money you invested. When you contribute money to paying off your mortgage, even if the values drop, you still have the security of a place to live, and are increasing the equity in the home, no matter how much it’s ultimately worth.

Making extra payments ensures you’ll eventually have a debt-free asset that provides shelter to you and your family, regardless of what happens to the housing market in your neighborhood.

Cons of paying down your mortgage vs. saving for retirement

There are some cases where paying down your mortgage faster might actually hurt you financially. Before adding extra principal to your mortgage payments, you’ll want to make sure you aren’t doing damage to your financial outlook with an extra contribution toward your mortgage payoff.

You might end up paying more in taxes

The higher interest payments you make during the early years of your mortgage can act as a tax benefit, so paying the balance down faster could actually result in you owning more in federal taxes. If you are in a higher tax bracket in the early (first 10 years) of your mortgage repayment schedule, it may make sense to focus extra funds on retirement savings, and let your mortgage interest deduction work for you. Of course, everyone’s tax situation is different, so you’ll have to decide (with help from an accountant ideally) if it makes sense to itemize your taxes in order to claim mortgage interest payments as a deduction.

You won’t get to enjoy the return on your paydown dollars until you sell

The only real benchmark for figuring out the value of paying down your mortgage is to look at how much equity you’re gaining over time. However, the equity doesn’t become a tangible profit until you actually sell your home. And the costs of a sale can take a big bite out of your equity because sellers usually pay the real estate agent fees.

Home equity is harder to access

The only way to access the equity you’ve built up is to borrow against it, or sell your home. Borrowing against equity often requires proof of income, assets and credit to confirm you meet the approval requirements for each equity loan option. If you fall on hard financial times due to a job loss, or are unable to pay your bills and your credit scores drop substantially, you may not be able to access your equity.

Pros of saving for retirement vs. paying down your mortgage

Depending on your financial situation and savings habits, it may be better to add extra funds monthly to your retirement account than to pay down your mortgage. Here are a few reasons why.

You may earn a higher return on dollars invested in retirement funds

The growth rate for a stock portfolio has consistently returned more than housing price returns. The average return in the benchmark S&P stock fund is 6.595% for funds invested from the beginning of 1900 to present, while home values have increased just 0.1% per year after accounting for inflation during that same time period.

Assuming your portfolio at least earns 7%, if you consistently invest your money into a balanced investment portfolio, you can expect to double your money every 10 years. There aren’t many housing markets that can promise that kind of growth.

Retirement funds are generally easier to access than home equity

Retirement funds often give you a variety of options for each access, with no income or credit verification requirements, and only sufficient proof of enough funds in your account to pay it back over time. For example, a 401k loan through the company you work for will just require you to have enough vested to support the loan request, and sufficient funds left over to pay it off over a reasonable time.

Just be cautious about making a 401k withdrawal, which is treated totally differently than a loan. You aren’t expected to pay it back like you would a 401k loan, but you could get hit with taxes and penalties.

Cons of saving for retirement vs. paying down your mortgage

You’ll need to weather the ups and downs of the market

Most people who have invested money in the stock market or tracked the performance of their 401k over decades have stories about periods when the value of those investments dropped substantially. While the 7% return on investment is a reliable long term indicator how much your retirement fund might earn, the path to that return is hardly linear.

For example, if you were considering retirement between 1999 and 2002, you may have had to delay those plans when the S & P plummeted over 23% in value in 2002. If you look at each 10-year period since the 1930s, every decade has been characterized by periods of ups and downs.

Calculating the benefit of paying down your mortgage vs. saving for retirement

If you’re torn as to what to do with that extra cash or windfall, let’s look at an example of someone who has an extra $200 to put into either their nest egg or their mortgage each month for the next 30 years.

For this scenario, we’re going to assume their retirement account earns an average 7% rate of return and that their mortgage loan balance is $200,000.

Here’s how much they’d save:

Savings From Paying $200 per Month Down on Your Mortgage
Years PaidMortgage Interest SavingsExtra Equity in HomeTotal Interest Savings and Equity Built Up
10 years$6,040$30,039$36,079
20 years$28,529$76,529$105,058
22 years 6 months$50,745$200,000$250,745

One thing you may notice about the mortgage savings chart — it includes how much extra equity you’re building. Often only the mortgage interest savings is cited when people look at how much you save with extra payments, but that ignores the fact that you’re building equity in your home much faster as well. So not only do you save over $50,000 in interest with your extra contribution, you replenish $150,000 of equity that was used up by your mortgage balance.

As you can see, adding that extra $200 to their mortgage principal each month saved them about $200,000 in the long haul — but the real savings don’t stop there.

By adding an extra $200 to their mortgage payment each month, this borrower turned their 30-year loan into a 22-and-a-half year loan and became mortgage debt-free seven years faster.

That means, in addition to saving $50,000 in interest savings and gaining $200,000 of equity, they also no longer have a mortgage payment. That frees up $998.57 per month that they can now use as discretionary income. That’s an extra $89,871 they could potentially save over that 7.5 year period.

When you add that to the $250,745.41 they saved on mortgage interest and earned in home equity, they’re looking at a total savings of $340,616.

That gives the mortgage paydown a $54,000 net positive edge over saving that extra $200 for retirement, as you can see in the table below.

Savings From Contributing $200 per Month to a Retirement Fund
Years PaidRetirement Balance
10 years$34,404
20 years$102,081
30 years$235,212

The one caveat for this retirement calculation is we assumed the saver was starting at a $0 investment balance. If they already had a healthy balance in their nest egg, they might actually come out in better shape than paying down their mortgage.

There are clearly benefits to each option, and you should consider running your own calculations with your real numbers to get the best answer for yourself.

Paying down your mortgage and saving for retirement at the same time

There’s a fair case to be made for both paying down your mortgage and saving more for retirement, but why choose? If you’re somewhat on track with your retirement savings goals, and like the idea of having your mortgage paid off quicker, you could allocate a certain amount to each.

Pick a number you feel comfortable paying to your principal every month, and then to your 401k, and put it on autopilot for a year. Any time your income increases, or you get bonuses, divide up the amount between principal pay down and retirement additions.

Let’s look at what happens if you evenly divide up your $200 per month between investing your retirement and paying down your mortgage. We’ll use the same $200,000 loan at 4.375% referenced above, and look at the lifetime results.

Savings From Paying $100 Down on Your Mortgage Until Paid Off
Years PaidInterest SavingsExtra Home EquityTotal Interest Savings and Equity Built Up
10 years$3,020$15,020$18,040
20 years$14,265$38,265$52,350
25 years$30,534$200,000$230,534
Savings From Contributing $100 to a Retirement Fund for 30 Years
Years PaidRetirement Balance
10 years$17,202
20 years$51,401
30 years$117,607

Balancing the $100 investment in both strategies still yields a six-figure retirement balance after 30 decades, a debt-free house after 26 years, and shaves off $30,000 in mortgage interest expense. If you don’t like putting all your eggs into one financial basket, this may balance the risks and rewards of each option.

Final thoughts

Looking at the short term and the long term may provide you with the best framework for making a good decision about how to spend dollars on retirement versus extra mortgage payments. Be wary of any financial professional that tells you one path is absolutely better than another.

Having a stable source of affordable shelter is equally as important as having enough income to live when you retire, so a balanced approach to paying down your mortgage and savings for retirement may help you accomplish both goals.

Advertiser Disclosure: The products that appear on this site may be from companies from which MagnifyMoney receives compensation. This compensation may impact how and where products appear on this site (including, for example, the order in which they appear). MagnifyMoney does not include all financial institutions or all products offered available in the marketplace.

Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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Life Events, Mortgage

What Is Mortgage Amortization?

Editorial Note: The content of this article is based on the author’s opinions and recommendations alone. It has not been previewed, commissioned or otherwise endorsed by any of our network partners.

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One of the biggest advantages of homeownership versus renting is each mortgage payment gradually pays off your mortgage and builds equity in your home. The difference between your home’s value and the balance of your loan is home equity, and your equity grows with each payment because of mortgage amortization.

Understanding mortgage amortization can help you set financial goals to pay off your home faster or evaluate whether you should refinance.

What is mortgage amortization?

Mortgage amortization is the process of paying off your loan balance in equal installments over a set period. The interest you pay is based on the balance of your loan (your principal). When you begin your payment schedule, you pay much more interest than principal.

As time goes on, you eventually pay more principal than interest — until your loan is paid off.

How mortgage amortization works

Understanding mortgage amortization starts with how monthly mortgage payments are applied each month to the principal and interest owed on your mortgage. There are two calculations that occur every month.

The first involves how much interest you’ll need to pay. This is based on the amount you borrowed when you took out your loan. It is adjusted each month as your balance drops from the payments you make.

The second calculation is how much principal you are paying. It is based on the interest rate you locked in and agreed to repay over a set period (the most popular being 30 years).

If you’re a math whiz, here’s how the formula looks before you start inputting numbers.

Fortunately, mortgage calculators do all the heavy mathematical lifting for you. The graphic below shows the difference between the first year and 15th year of principal and interest payments on a 30-year fixed loan of $200,000 at a rate of 4.375%.

For the first year, the amount of interest that is paid is more than double the principal, slowly dropping as the principal balance drops. However, by the 15th year, principal payments outpace interest, and you start building equity at a much more rapid pace.

How understanding mortgage amortization can help financially

An important aspect of mortgage amortization is that you can change the total amount of interest you pay — or how fast you pay down the balance — by making extra payments over the life of the loan or refinancing to a lower rate or term. You aren’t obligated to follow the 30-year schedule laid out in your amortization schedule.

Here are some financial objectives, using LendingTree mortgage calculators, that you can accomplish with mortgage amortization. (Note that MagnifyMoney is owned by LendingTree.)

Lower rate can save thousands in interest

If mortgage rates have dropped since you purchased your home, you might consider refinancing. Some financial advisors may recommend refinancing only if you can save 1% on your rate. However, this may not be good advice if you plan on staying in your home for a long time. The example below shows the monthly savings from 5% to 4.5% on a $200,000, 30-year fixed loan, assuming you closed on your current loan in January 2019.

Assuming you took out the mortgage in January 2019 at 5%, refinancing to a rate of 4.5% only saves $69 a month. However, over 30 years, the total savings is $68,364 in interest. If you’re living in your forever home, that half-percent savings adds up significantly.

Extra payment can help build equity, pay off loan faster

The amount of interest you pay every month on a loan is a direct result of your loan balance. If you reduce your loan balance with even one extra lump-sum payment in a given month, you’ll reduce the long-term interest. The graphic below shows how much you’d save by paying an extra $50 a month on a $200,000 30-year fixed loan with an interest rate of 4.375%.

Amortization schedule tells when PMI will drop off

If you weren’t able to make a 20% down payment when you purchased your home, you may be paying mortgage insurance. Mortgage insurance protects a lender against losses if you default, and private mortgage insurance (PMI) is the most common type.

PMI automatically drops off once your total loan divided by your property’s value (also known as your loan-to-value ratio, or LTV) reaches 78%. You can multiply the price you paid for your home by 0.78 to determine where your loan balance would need to be for PMI to be canceled.

Find the balance on your amortization schedule and you’ll know when your monthly payment will drop as a result of the PMI cancellation.

Pinpoint when adjustable-rate-mortgage payment will rise

Adjustable-rate mortgages (ARMs) are a great tool to save money for a set period as long as you have a strategy to refinance or sell the home before the initial fixed period ends. However, sometimes life happens and you end up staying in a home longer than expected.

Knowing when and how much your payments could potentially increase, as well as how much extra interest you’ll be paying if the rate does increase, can help you weigh whether you really want to take a risk on an ARM loan.

The bottom line

Mortgage amortization may be a topic that you don’t talk about much before you get a mortgage, but it’s certainly worth exploring more once you become a homeowner.

The benefits of understanding how extra payments or a lower rate can save you money — both in the short term and over the life of your loan — will help you take advantage of opportunities to pay off your loan faster, save on interest charges and build equity in your home.

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Denny Ceizyk
Denny Ceizyk |

Denny Ceizyk is a writer at MagnifyMoney. You can email Denny here

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