If you've ever wondered why your mortgage balance seems to barely move in the first few years despite years of payments, amortization is the answer. Lenders calculate interest on whatever balance remains, and since your balance starts at its highest point, the interest chunk of each early payment is also at its highest.
The Formula
Worked Example: $300,000 Mortgage at 6.5% for 30 Years
A $300,000 loan at a 6.5% annual rate (0.5417% monthly), amortized over 30 years (360 payments), produces a fixed monthly payment of about $1,896. Here's how that payment splits at different points in the loan:
| Payment # | Interest Portion | Principal Portion | Remaining Balance |
|---|---|---|---|
| 1 | $1,625 | $271 | $299,729 |
| 60 (yr 5) | $1,532 | $364 | $282,485 |
| 180 (yr 15) | $1,220 | $676 | $224,573 |
| 300 (yr 25) | $570 | $1,326 | $104,684 |
| 360 (yr 30) | $10 | $1,886 | $0 |
By payment 300, the split has essentially flipped: principal now dominates the payment. Over the full 30 years, this loan pays roughly $382,633 in total interest — more than the original loan amount itself.
Why Extra Principal Payments Are Powerful
Because interest is charged on the outstanding balance, every extra dollar you put toward principal early in the loan avoids decades of future interest on that dollar. Adding just $200/month extra to the example above can cut the loan term by roughly 6-7 years and save tens of thousands of dollars in interest.
Figures above are illustrative estimates only, not financial advice. Actual loan terms, rates, and amortization schedules vary by lender.