Rates & interest

Amortization

The process of paying off a loan through regular payments, where each payment covers the interest due first and reduces the principal with the remainder. Early payments are mostly interest; later ones mostly principal.

Sources

What does amortization mean?

On an amortizing loan your payment stays level, but its split shifts every month: because interest is charged on the outstanding balance, the early payments are mostly interest and only a sliver goes to principal. As the balance falls the interest portion shrinks and principal repayment accelerates, which is why the last years of a 30-year mortgage retire the balance far faster than the first. An amortization schedule lays out that split, payment by payment.

An amortization snapshot

A $300,000, 30-year loan at 7% has a fixed principal-and-interest payment of about $1,996. Here is how the balance actually falls:

An amortization snapshot
Point in the loan	Remaining balance
Start	$300,000
After 10 years	about $257,400
After 20 years	about $171,900
After 30 years	$0

Total interest over the full term is about $418,500 — more than the amount borrowed. Principal does not overtake interest in the monthly split until about month 242, in year 21.

To work a schedule by hand or in a spreadsheet, use the printable amortization worksheet and its template.

Loans that don’t fully amortize

Not every loan follows this pattern. Interest-only loans collect interest alone for a set period, so the balance does not fall at all; balloon loans amortize over a long schedule but come due early; and negative-amortization loans let unpaid interest add to the balance. Each shifts repayment to later — usually at a higher cost.

Frequently asked

How is amortization calculated?

Each month the interest portion equals your rate divided by 12, times the current balance; the rest of your fixed payment goes to principal.

The next month interest is figured on the slightly lower balance, so the principal share grows a little with every payment. An amortization schedule tabulates that split for all 360 payments.

Why do early mortgage payments go mostly to interest?

Because interest is charged on the outstanding balance, which is largest at the start. On a fresh $300,000 loan the first payment is almost all interest and barely touches principal; as the balance falls the interest slice shrinks and principal repayment speeds up.

Do extra payments change the amortization schedule?

Yes. Any amount applied to principal shrinks the balance immediately, so less interest accrues and the remaining schedule shortens — often by years. It does not lower your required monthly payment, but it moves your payoff date forward.