What is amortization on a mortgage? The way a level mortgage payment retires the loan: interest is charged on the balance still owed, so early payments are mostly interest and late ones mostly principal.
Amortization is how a fixed mortgage pays itself off. The payment is set once, from the loan amount, the rate and the term, and it does not move for the life of the loan. What moves every month is the split inside it. Interest is charged on the balance still outstanding, so as the balance falls the interest share of the payment falls with it and the principal share grows to fill the gap. Written out month by month, with the payment, the interest, the principal and the remaining balance in four columns, that table is the amortization schedule, and a lender will produce one on request.
The arithmetic starts slowly. Take $360,000 at 6.5 percent over 30 years, the calculator's defaults on a $450,000 price with 20 percent down: the payment is about $2,275 of principal and interest. The first month of it is $1,950 interest and $325 principal. Twelve payments in, about $27,300 has been paid and roughly $4,024 of the balance has gone, leaving about $355,976. Principal does not overtake interest inside the same payment until month 233, a little over 19 years in. Interest over the full term comes to about $459,000 on a $360,000 loan.
Two things bend that curve, and both are arithmetic rather than advice. Extra principal shortens the schedule rather than lowering the payment: $200 a month on top of that loan clears it in about 24 years and cuts total interest to roughly $350,000, because a dollar of principal removes every future dollar of interest it would have carried. A shorter term does the same thing on a fixed schedule, at a higher payment: the same $360,000 at 6.5 percent over 15 years is about $3,136 a month and about $204,000 of interest. Rates move, so treat all of that as an example at a stated rate and run the case at hand.
A worked example
A $360,000 loan at 6.5 percent over 30 years pays $2,275 a month. Month one is $1,950 interest and $325 principal. Month 120 is about $1,656 interest and $619 principal, with $305,194 still owed. Month 233 is the first where principal ($1,140) beats interest ($1,136). Paid to term, the $360,000 costs about $459,000 in interest; with $200 a month extra it clears in about 24 years and costs about $350,000.
Run the payment and the schedule
Questions people ask
Why is so much of an early mortgage payment interest?
Because interest is charged on the balance outstanding, and at the start almost the whole loan is outstanding. On a $360,000 loan at 6.5 percent, one month of interest on the full balance is $1,950 of a $2,275 payment, and only what is left over goes to principal.
Does paying extra principal lower the monthly payment?
No, not on its own. The payment stays the same and the schedule gets shorter, because the extra reduces the balance the remaining interest is charged on. Lowering the payment against a smaller balance is a recast or a refinance, which are separate transactions with their own costs.