How Mortgage Amortization Works, and What Extra Payments Really Save
By the Find a Calculator editorial team ·
Amortization is the schedule by which a fixed monthly payment pays off a loan. Each payment first covers the interest that built up during the month; whatever is left reduces the balance. Because the balance is largest at the start, so is the interest, and that single fact explains most of what surprises people about mortgages.
A worked example
Take a $400,000 home with 20% down, leaving a $320,000 loan at 6.5% over 30 years. The principal-and-interest payment is $2,022.62 a month. You can reproduce every figure below in the mortgage calculator.
In the first month, interest is $320,000 x 6.5% / 12 = $1,733.33. That is 85.7% of the payment. Only $289.29 comes off the balance.
| Point in the loan | Interest share of payment | What it means |
|---|---|---|
| Month 1 | 85.7% | $289 of principal repaid |
| Year 19, month 5 | 50% | Principal and interest are equal |
| Final year | Under 4% | Nearly all principal |
Over the full 30 years the borrower pays $408,142 in interest on a $320,000 loan. The house has effectively been paid for more than twice.
Why the balance barely moves at first
Interest is charged on what you still owe. In year one you owe almost the whole loan, so almost the whole payment is interest. As the balance falls, each month's interest charge shrinks by a few dollars and the principal portion grows by the same amount. The change compounds: slow for a decade, then quick.
This is not a penalty or a lender trick. It is the arithmetic of charging a fixed percentage on a declining balance. The amortization calculator lays it out year by year.
What an extra $200 a month does
Extra payments go entirely to principal, which removes that money from every future interest calculation. On the same $320,000 loan, adding $200 to each payment produces this result:
| Standard payment | With $200 extra | |
|---|---|---|
| Monthly payment | $2,022.62 | $2,222.62 |
| Time to pay off | 30 years | 23 years 5 months |
| Total interest | $408,142 | $302,714 |
The extra payments total $56,200 over the life of the loan and save $105,428 in interest, while ending the mortgage 6 years and 7 months early. Test your own figures with the loan payoff calculator.
15-year versus 30-year
A shorter term forces the same effect. Fifteen-year loans usually carry a lower rate as well. At 5.9% over 15 years the $320,000 loan costs $2,683.08 a month and $162,955 in total interest: $660 more each month, and $245,187 less interest overall.
The 30-year loan with voluntary extra payments sits in between, and keeps the option of dropping back to the lower required payment in a tight month.
Three practical points
- Extra payments early in the loan save the most, because they remove principal that would otherwise accrue interest for decades.
- Tell your servicer to apply extra amounts to principal. Some will otherwise hold the money toward the next scheduled payment.
- A larger down payment has the same effect from day one. Compare options with the down payment calculator.
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