How loans are gradually paid off — and why you pay mostly interest at first.
Amortization is the process of paying off a loan through regular, scheduled payments over time. Each payment covers two things: the interest charged for that period and a portion of the principal (the original amount borrowed).
The key characteristic of amortization: early payments are mostly interest, while later payments are mostly principal. This front-loading of interest is why refinancing or paying extra early in a loan's life saves the most money.
An amortization schedule is a complete table showing every payment, how much goes to interest, how much reduces principal, and the remaining balance after each payment.
The monthly payment is calculated so that after the final payment, the balance reaches exactly zero. The formula:
Where M = monthly payment, P = principal, r = monthly rate, n = number of payments
$350,000 mortgage at 7.0% for 30 years. Monthly payment: $2,329
| Payment # | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| #1 | $2,329 | $2,042 | $287 | $349,713 |
| #12 | $2,329 | $2,024 | $305 | $346,340 |
| #60 | $2,329 | $1,926 | $403 | $329,040 |
| #180 | $2,329 | $1,638 | $691 | $279,760 |
| #360 | $2,316 | $13 | $2,303 | $0 |
Total paid over 30 years: $838,440. Total interest: $488,440 — that's why extra principal payments are so powerful.
Understanding amortization helps you make smarter loan decisions:
See your full amortization schedule with our free mortgage and loan calculators.