How mortgage amortization works
Amortization is the schedule that turns a big loan into equal monthly payments. Each payment covers the month's interest first, and whatever is left pays down principal. Because interest is charged on a shrinking balance, that leftover grows every month.
Last reviewed August 2026
The mechanics
Each month the lender multiplies your remaining balance by one-twelfth of the annual rate to get that month's interest. Subtract that from your fixed payment and the remainder reduces the principal. Next month the balance is a little smaller, so the interest slice is a little smaller and the principal slice a little bigger.
On a 30-year loan at a typical rate, the first payment is roughly 75–80% interest. It takes about 18–20 years before more of each payment goes to principal than to interest — the crossover point.
What an extra payment does
An extra principal payment skips straight to the balance. It does not lower your required monthly payment, but it removes all the future interest that principal would have accrued, and it moves your payoff date forward. Early in the loan, when the balance is largest, extra payments are most powerful.
- $100 extra per month on a $300,000, 30-year loan at 6.5% saves roughly $70,000 in interest and cuts about 5 years off the term.
- A single $10,000 lump sum in year 2 can save more than $25,000 over the life of the loan.
- The same $10,000 applied in year 20 saves only a few thousand — the remaining interest is already small.
Terms in this guide
- Amortization — The process of paying off a loan through fixed periodic payments, where each payment covers the interest accrued that period and applies the remainder to the principal balance. Early payments are mostly interest; later payments are mostly principal.
- Amortization schedule — A table listing every payment over a loan's life, split into principal and interest, with the running balance after each payment. It shows exactly when the loan crosses from mostly-interest to mostly-principal.
- Principal — The amount of money actually borrowed and still owed, separate from the interest charged to borrow it. Each mortgage payment reduces the principal by a little more than the last.
- Interest — The cost of borrowing, charged as a percentage of the outstanding principal. On an amortizing mortgage, interest is calculated on the remaining balance each month, so it shrinks as the balance falls.
- Prepayment penalty — A fee some loans charge if you pay off the balance early, whether by selling, refinancing, or making large extra payments. Federally backed and most conventional mortgages made today do not carry one, but always confirm.