You’re right in the middle of the home buying process. It’s all new, exciting and a little confusing.

You think you understand the process: You find your dream home, decide on a down payment and borrow the rest. Then, in just 30 years, that dream home is all yours. It all sounds simple until your lender brings up “amortization.”

What exactly is amortization?

A monthly mortgage payment consists of two things:

• The principal, which is the amount of money you’ll need to borrow to buy the house.
• The interest, which is the amount charged by the lender to borrow the principal amount.

When you start paying off your mortgage, the interest portion of your payment is high and the principal payment is low. As you get closer to the end of the loan, the reverse happens — interest payments are low and principal payments are high.

Amortization makes monthly payments on a home loan equal and more predictable, which can help homeowners better manage their finances, plan for expenditures like a new car or a kid’s education, and have a little put aside for emergencies or a well-earned vacation. Without amortization, your monthly mortgage payments would change every month.

How does amortization work?

When you first take out a home loan, regardless of whether you’re buying a home or refinancing an existing mortgage, the balance of the loan is at its peak. That means the amount of interest you owe on the entire loan also is the highest it will ever be.

In theory, your lender could skip amortization and make the loan payments include equal portions of the principal balance. But it would quickly become a budgeting hassle to pay a different amount each month.

What if you didn’t have amortization?

Let’s say you were looking to make an offer on a house. Your lender suggests that the best mortgage for you would be a 30-year fixed mortgage. With 12 monthly payments per year, that would mean 360 monthly payments.

To make the math more straightforward in this example, let’s say the offer you make is for $400,000, and you’re putting down 10% or $40,000. To buy the house, you’ll need to borrow $360,000.

Now let’s say that the $360,000 mortgage is not amortized. Each of the 360 monthly payments would consist of $1,000 in principal paydown, plus interest charged on the balance. Because the principal would decrease by $1,000 after every payment, your interest will change every month.

Your first month’s payment will include interest on the entire $360,000. For your second month, you’d pay interest on $359,000. For your third, it would be $358,000, and so on. The change in interest charged would make it hard to budget for the rest of life’s expenses. This is why traditional mortgages are amortized.

In this example, it would take about six years for the principal portion of your payment to exceed the interest portion. This is interesting to note, as with a 15-year loan you would pay more toward principal than interest starting on day 1. With a 15-year loan, your total monthly payment is higher; however, the total interest paid is a less than half of what you’d pay on a traditional 30-year loan. This is due to paying interest for half the amount of time (15 years vs. 30 years.)

Uncertainty fixed with amortization

Without amortization, you also would have much larger payments at the beginning of your loan repayment, which you might not be able to afford. Amortization fixes this complication and budgeting concern by setting a fixed recurring monthly payment amount for the life of the loan — even though you’ll be paying off the loan’s interest and principal in different amounts each month. As mentioned, interest costs are at their highest early on. In time, funds that go toward your principal increase while funds going to interest get reduced.

Visualize your amortization

The easiest way to understand amortization is to check out an amortization table, a visual representation that lists each monthly loan payment and details how much goes to either the interest or the principal. If you have a mortgage, an amortization table was included in your loan documents.

If you’re in the research process, you can find examples all over the internet. Be careful to use a mortgage calculator that takes into account estimated taxes and insurance. This doesn’t affect the amortization of your loan, but will affect the total payment.

When shopping for a home, you don’t want to assume a lower payment than you’re getting once property taxes and insurance are factored in. If you’re already working with a mortgage lender, they can provide the amortization table at any time during the process — even during the pre-approval stage.

It’s great to talk to a lender early in the home buying process, as they can help you compare different mortgage terms to make the right decision for you and your family.