Amortization
Amortization is the process of repaying a mortgage through scheduled periodic payments that include both principal and interest. Each payment reduces the outstanding loan balance over the full loan term, with early payments weighted heavily toward interest and later payments primarily reducing principal.
What This Means
How Amortization Works
A fully amortizing mortgage divides the total repayment into equal monthly installments calculated to pay off the loan completely by the end of the term. In a 30-year fixed-rate mortgage, this means monthly payments. Each payment is split between interest (calculated on the current outstanding balance) and principal reduction. Because the balance is highest at the start, early payments allocate the majority to interest.
The Amortization Schedule
An amortization schedule is a table showing every payment over the life of the loan, broken down by:
- Payment amount (fixed for fixed-rate loans)
- Interest portion (decreases over time)
- Principal portion (increases over time)
- Remaining balance after each payment
On a $300,000 loan at for 30 years, the monthly principal and interest payment is approximately . In the first payment, roughly goes to interest and only reduces the principal. By payment 180 (halfway through), the split is closer to equal. By the final years, nearly the entire payment applies to principal.
Why Amortization Matters
Understanding amortization helps borrowers evaluate how quickly they build equity, the true cost of extending a loan term, and the financial impact of making extra principal payments. Borrowers who make additional payments early in the loan term save disproportionately on total interest because they reduce the balance that future interest is calculated against.