Loans
Amortization
The process of gradually paying off a loan through scheduled payments that cover both principal and interest over time. In the early years of a mortgage, most of each payment goes toward interest. As you pay down the balance, a larger share of each payment goes toward the principal. A standard 30-year mortgage is fully amortized, meaning it will be completely paid off at the end of the term.
Why It Matters
Amortization is how your mortgage payment gets split between principal and interest over time. In the early years, most of your payment goes to interest — on a $300,000 loan at 6.5%, your first payment of $1,896 includes $1,625 in interest and only $271 toward principal. That ratio gradually shifts until the final years, when nearly all of each payment reduces your balance.
Understanding amortization explains why extra payments early in your loan are so powerful. An extra $200/month in year 1 goes directly to principal and saves you from paying interest on that $200 for the remaining 29 years. The same $200 extra in year 25 saves far less because you're already paying mostly principal.
Real-World Example
On a $300,000 loan at 6.5% for 30 years: Month 1 payment is $1,896 ($1,625 interest + $271 principal). By month 180 (halfway): $1,896 ($1,064 interest + $832 principal). By month 300: $1,896 ($340 interest + $1,556 principal). Total interest over 30 years: $382,633.
Pro Tip
Use our amortization schedule calculator to see exactly how every payment splits — and model how extra payments can save you tens of thousands in interest.