How amortization works: why early payments are mostly interest

Many borrowers are surprised by their first mortgage statement: after a year of payments, the balance has barely moved. Nothing is wrong. It is how amortization works, and understanding it explains why extra payments and shorter terms save so much.

How each payment is split

A fixed-rate loan has one payment for its whole life. Each month, the lender first charges interest on the balance you still owe: the balance × the yearly rate ÷ 12. Whatever is left of the payment repays principal, which lowers the balance, which lowers next month’s interest. The payment is set so that the balance reaches exactly zero with the last one.

One loan, month by month

Take a $300,000 loan at 6.5% over 30 years. The monthly payment is about $1,896.

In the first month, interest is 6.5% of $300,000 divided by 12: $1,625. Only about $271 goes to principal. Over the whole first year, you pay about $19,401 of interest and repay only about $3,353 of the loan: roughly 85% of what you paid was interest.

The split shifts slowly. Principal only overtakes interest with payment 233, nearly 20 years in. Half the loan is repaid only after payment 257, more than 21 years in. After ten years you have paid about $227,500, yet you still owe about $254,300. By the last payment, interest is about $10.

Over 30 years, the loan costs about $382,600 of interest, more than the amount borrowed.

Why it is front-loaded

The lender is not charging more early on. The rate is the same every month; it is simply applied to a much larger balance at the start. Interest is the price of the money you still hold, and early in the loan you hold almost all of it.

This is also why a longer term costs so much more. A 30-year loan keeps the balance high for longer, so interest is charged on more money for more months. The 15-year vs. 30-year mortgage guide compares the two in detail.

What extra payments do

An extra payment skips the interest step and goes straight to principal. Every unit of balance it removes stops charging interest for the rest of the loan, so extra money paid early saves the most.

Add $200 a month to the same loan and it is paid off after 277 payments instead of 360: about seven years sooner. Total interest falls to about $279,200, a saving of about $103,400. The required payment does not change; the loan simply ends earlier.

Before paying extra, check that your loan has no prepayment penalty, and compare the interest you save with what the same money could earn elsewhere. Paying down a 6.5% loan is a guaranteed 6.5% return; an emergency fund or a higher-rate debt may still come first.

Reading a schedule

An amortization schedule lists every payment with its interest, its principal and the balance left. It answers practical questions: how much you will still owe when you plan to sell, how much interest a year costs you, and when refinancing would reset the clock. Your lender’s figures may differ by a few cents, because lenders round each month to the cent.

See the full schedule for your own loan, with or without extra payments, in the amortization calculator, or the full monthly cost including tax and insurance in the mortgage calculator. Thinking of a new rate? Read when does refinancing pay off?