What Is Amortization?
Amortization is the process of gradually paying off a mortgage through a series of fixed monthly payments. Each payment covers interest owed for the current period plus a portion of the principal balance. Over the life of the loan, the interest portion decreases and the principal portion increases — even though the total payment stays the same.
This structure is by design: lenders earn more interest when the balance is highest (early in the loan), while the borrower builds equity slowly at first, then rapidly in later years.
Monthly Payment = P × [r(1+r)ⁿ] / [(1+r)ⁿ − 1] where P = principal, r = monthly rate, n = number of payments
Amortization Schedule Example
For a $400,000 mortgage at 6.8% over 30 years, the monthly payment is $2,617. Here's how the payment splits at key points:
| Payment # | Month | Interest | Principal | Balance Remaining |
|---|---|---|---|---|
| 1 | Month 1 | $2,267 | $350 | $399,650 |
| 60 | Year 5 | $2,198 | $419 | $385,700 |
| 120 | Year 10 | $2,097 | $520 | $369,000 |
| 180 | Year 15 | $1,952 | $665 | $346,200 |
| 240 | Year 20 | $1,749 | $868 | $308,500 |
| 300 | Year 25 | $1,449 | $1,168 | $253,400 |
| 360 | Year 30 | $15 | $2,602 | $0 |
Note: Values rounded for illustration. Total interest paid over 30 years: ~$542,000 on a $400,000 loan.
Interest-Only vs Fully Amortizing
Interest-only mortgages require only interest payments for an initial period (typically 5–10 years), with no principal reduction. At the end of the interest-only period, the remaining balance must be paid off (balloon payment) or the loan resets to a fully amortizing schedule — resulting in significantly higher monthly payments.
The Real Cost of Front-Loaded Interest
On a $400K loan at 6.8% over 30 years, you'll pay $542,000 in total interest — 135% of the original loan amount. In the first 10 years, you pay $219,000 in interest and only reduce the principal by $31,000. This is why extra principal payments in early years have outsized long-term impact.
Accelerating Payoff with Extra Principal
Making additional principal payments — even small amounts — can shave years off a mortgage and save substantial interest. On a 30-year $400K loan at 6.8%:
