Mortgage Amortization, Explained
Your payment stays the same for 30 years, but what it pays for changes every single month.
What amortization means
To amortize a loan is to pay it off with a series of equal payments, each covering that month’s interest plus some principal. The payment is set with the standard formula so that the last payment brings the balance to exactly zero:
M = P × r / (1 − (1 + r)^−n)
Every month the lender works out interest on the current balance (balance × annual rate ÷ 12); whatever is left of your payment reduces the balance. Next month’s interest is a little lower, so a little more goes to principal — and so on.
A worked schedule
Take $300,000 at 6.5% for 30 years. The payment is $1,896.20.
| Payment # | Interest | Principal | Balance after |
|---|---|---|---|
| 1 | $1,625.00 | $271.20 | $299,729 |
| 2 | $1,623.53 | $272.67 | $299,456 |
| 12 | $1,608.40 | $287.80 | $296,647 |
| 60 | $1,523.20 | $373.00 | $280,833 |
| 120 | $1,380.41 | $515.79 | $254,329 |
| 180 | $1,182.96 | $713.24 | $217,679 |
| 240 | $909.91 | $986.29 | $166,998 |
| 300 | $532.35 | $1,363.85 | $96,916 |
| 359 | $20.40 | $1,875.80 | $1,891 |
| 360 | $10.24 | $1,890.67 | $0 |
Three things stand out:
- The first payment is 86% interest.
- Principal doesn’t overtake interest until payment 233 — more than 19 years in.
- After 10 years you still owe $254,329, about 85% of the original loan.
Over the full term you pay $382,637 in interest — more than the amount borrowed.
Equity builds slowly at first
Home equity is the home’s value minus what you owe. Because early payments are mostly interest, paying down the loan builds equity slowly for the first several years; in that period, price appreciation often matters more. This is also why selling within a few years of buying can leave little cash after selling costs — see the rent vs buy calculator.
How extra payments change the schedule
An extra payment goes entirely to principal. The required payment doesn’t change, but the balance is lower, so every future payment has less interest and more principal. The effect compounds:
| Strategy | Paid off in | Total interest | Interest saved |
|---|---|---|---|
| No extra | 30 years | $382,637 | — |
| +$100 a month | 26 years | $321,641 | $60,996 |
| +$300 a month | 20 years 10 months | $247,519 | $135,117 |
| $10,000 once, in month 12 | 27 years 5 months | $332,406 | $50,230 |
| $10,000 once, in month 240 | 29 years 3 months | $373,969 | $8,668 |
The same $10,000 saves far more when paid in year one than in year twenty, because it has longer to stop interest from accruing. Model your own plan in the mortgage payoff calculator.
Amortization and refinancing
Refinancing starts a new amortization schedule. If you refinance ten years into a 30-year loan with a new 30-year loan, you go back to payments that are mostly interest, and you will be paying for 40 years in total. That can still make sense if the rate drop is large, but it is why the refinance calculator compares lifetime cost, not just the monthly payment.
Why your statement may differ by a few cents
Servicers round interest to the cent each month and some compute interest using actual days rather than twelfths of a year, so real statements can differ slightly from any calculator. The final payment is usually adjusted to clear the last few cents.