Amortization
How loans are gradually paid off — and why you pay mostly interest at first.
What Is Amortization?
Amortization is the process of paying off a loan through regular, scheduled payments over time. Each payment covers two things: the interest charged for that period and a portion of the principal (the original amount borrowed).
The key characteristic of amortization: early payments are mostly interest, while later payments are mostly principal. This front-loading of interest is why refinancing or paying extra early in a loan's life saves the most money.
How an Amortization Schedule Works
An amortization schedule is a complete table showing every payment, how much goes to interest, how much reduces principal, and the remaining balance after each payment.
The monthly payment is calculated so that after the final payment, the balance reaches exactly zero. The formula:
Where M = monthly payment, P = principal, r = monthly rate, n = number of payments
Real Mortgage Example
$350,000 mortgage at 7.0% for 30 years. Monthly payment: $2,329
| Payment # | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| #1 | $2,329 | $2,042 | $287 | $349,713 |
| #12 | $2,329 | $2,024 | $305 | $346,340 |
| #60 | $2,329 | $1,926 | $403 | $329,040 |
| #180 | $2,329 | $1,638 | $691 | $279,760 |
| #360 | $2,316 | $13 | $2,303 | $0 |
Total paid over 30 years: $838,440. Total interest: $488,440 — that's why extra principal payments are so powerful.
Why Amortization Matters
Understanding amortization helps you make smarter loan decisions:
- Extra payments go straight to principal — reducing your balance and future interest faster than anything else.
- Refinancing early saves more — in the early years of a loan, you're almost entirely paying interest. Refinancing resets the clock on a lower rate.
- Shorter term = much less interest — a 15-year mortgage at 6.5% vs a 30-year at 7% saves over $200,000 on a $350K loan.
- ARM risk is real — adjustable-rate loans can dramatically change your payment mid-amortization schedule.
Calculate It Yourself
See your full amortization schedule with our free mortgage and loan calculators.