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Amortization
Amortization is the process of paying off a mortgage through regular monthly payments that cover both principal and interest over a set period, typically 15 or 30 years.
How It Works
Amortization is how your mortgage gets paid off over time. Each monthly payment is split between principal (reducing what you owe) and interest (the cost of borrowing). In the early years of a mortgage, most of your payment goes toward interest. Over time, the split reverses — more goes to principal and less to interest. This is because interest is calculated on the remaining balance, which shrinks with each payment. An amortization schedule shows this breakdown for every payment over the life of the loan. Understanding amortization explains why extra payments early in the loan save dramatically more interest than extra payments later.
Key Facts
Early payments are mostly interest; later payments are mostly principal
On a 30-year mortgage, you pay more interest than principal for roughly the first 20 years
Extra payments go directly to principal, accelerating the amortization
A 15-year mortgage amortizes faster, saving tens of thousands in interest
Interest is calculated on the remaining balance each month
The amortization formula: M = P[r(1+r)^n] / [(1+r)^n – 1]
Example
On a $360,000 loan at 6.75% for 30 years, your first payment of $2,335 breaks down as: $2,025 interest + $310 principal. By year 15, the same $2,335 payment splits: $1,340 interest + $995 principal. By year 28: $200 interest + $2,135 principal.
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Frequently Asked Questions
Interest is calculated as a percentage of your remaining balance. Early in the loan, your balance is highest, so interest charges are highest. As you pay down the balance, less interest accrues and more of your payment goes to principal.
Extra payments go directly to principal, which reduces the balance that interest is calculated on. This creates a compounding effect — each extra payment saves interest not just on itself, but on all future payments. An extra $200/month on a $360K loan at 6.75% saves about $95,000 in interest and pays off the loan 7 years early.