Amortization
Amortization is the process of paying off your mortgage through regular monthly payments over time. Each payment covers both interest and a portion of the loan principal. Early payments are weighted heavily toward interest; later payments shift toward paying down principal.
On a 30-year fixed mortgage of $350,000 at 7%, your monthly payment is about $2,329. In month one, roughly $2,042 goes to interest and only $287 reduces your loan balance. By year 25, that split reverses — most of each payment is paying down principal.
This front-loading of interest is why homeowners build equity slowly in the early years. After 5 years on that same loan, you've paid roughly $139,740 but reduced your balance by only about $13,000. Understanding amortization helps you decide whether paying extra principal early makes financial sense for your situation.
You can view an amortization schedule — a table showing every payment's split between principal and interest — from your lender or using free online calculators. Prepaying even small amounts of principal early in the loan can cut years off your mortgage and save tens of thousands in interest.
Key Takeaway
Amortization is the process of paying off your mortgage through regular monthly payments over time. Each payment covers both interest and a portion of the loan principal. Early payments are weighted heavily toward interest; later payments shift toward paying down principal.
Related Terms
Frequently Asked Questions
It's a table showing every monthly payment over the life of your loan, broken down into how much goes toward interest and how much reduces your principal balance.
Yes. Extra principal payments reduce your balance faster, saving you interest and shortening your loan term — though your required monthly payment stays the same.
Interest is calculated on your outstanding balance each month. When your balance is highest — right at the start — the interest charge is highest too.
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