When banks make fixed-rate, principal + interest home loans, a borrower's monthly payment gets calculated from amortization schedules (ah-mor-ti-ZAY-shun).  With respect to mortgages, amortization is the process of paying a loan to $0 over time.

The Early Years Are Interest-Payment Heavy

For homeowners, a mortgage amortization schedule's most important trait is that it creates interest-heavy repayments in a loan's early life, with very little principal reduction.

At today's rates, it would take 20 years to reduce the principal balance on a 30-year, fixed-rate product by half.

Amortization schedules are "bank-friendly".

Having said that, the schedules bring benefit to homeowners, too. This is because mortgage interest is often tax-deductible.  The early, interest-heavy years of a loan, therefore, can provide larger tax benefits to homeowners than the interest schedule throughout the loan's later years.

Compare Payback Schedules

Here's some stats. Comparing different $300,000 loans at a rate of 5 percent, after 10 years:

• A 15-year mortgage has been paid down by 58 percent
• A 20-year mortgage has been paid down by 38 percent
• A 30-year mortgage has been paid down by 19 percent

After 15 years, the numbers look similarly disproportionate:

• A 15-year mortgage has been paid in full
• A 20-year mortgage has been paid down by 65 percent
• A 30-year mortgage has been paid down by 32 percent

And then, as interest rates climb, the numbers get more skewed in favor of the banks. At a 6.5 percent mortgage rate, for example, after 15 years, a 30-year fixed is barely one-quarter paid.  The bulk of the amortization doesn't happen until the last 5 years of the loan.

Dan Green is an active loan officer. Email or call 513-443-2020. Dan is on Twitter at @mortgagereports.