Mortgage Amortization

What Is It

Amortization is how a mortgage payment splits between interest and principal over the life of the loan, using a fixed total payment that doesn’t change month to month. Early payments are mostly interest; later payments are mostly principal — even though the payment amount itself stays flat the entire time. The shift happens gradually: every month the balance drops slightly, so the following month’s interest charge is a little smaller and a little more of that same fixed payment goes toward principal instead.

Why It Matters

This is the most common misconception about mortgages: people assume a 30-year loan builds equity at a roughly even pace. It doesn’t. Interest is calculated on the remaining balance each month, and since the balance is largest at the start, the interest portion is largest at the start too.

This is exactly why paying even a little extra toward principal early in a mortgage has an outsized effect on total interest paid over the loan’s life — every extra dollar early on is a dollar that stops accruing interest for decades, not months. The same logic runs the other way for refinancing: restarting the amortization clock on a new loan resets the payment mix back to mostly-interest, even if the new rate is lower, which is worth factoring in alongside the rate itself.

Quick Example

A $300,000 mortgage at 7% over 30 years has a monthly payment of $1,995.91. In month 1, $1,750.00 of that is interest and only $245.91 is principal — 88% interest. After a full 5 years of on-time payments (60 months, $119,754.60 paid in total), only $17,605.23 — just 5.9% of the original loan — has actually been paid down. Over $102,000 of the money paid over those five years went to interest, not equity — a reminder that the payment on a statement and the progress toward actually owning the home are two very different numbers.

Try It Yourself

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