Amortization explains why you pay mostly interest for the first decade of your mortgage — and why paying extra principal in the early years has such a powerful impact.
Amortization explains why you pay mostly interest for the first decade of your mortgage — and why paying extra principal in the early years has such a powerful impact.
Amortization is the process of paying off a loan through regular scheduled payments over time. Each mortgage payment covers two components: interest owed on the remaining balance, and principal reduction that lowers what you owe. In the early years of a mortgage, the vast majority of your payment goes to interest. This shifts gradually over time.
| Payment | Payment Amount | Interest Portion | Principal Portion | Balance Remaining |
|---|---|---|---|---|
| Month 1 | $2,297 | $1,988 | $309 | $349,691 |
| Month 12 | $2,297 | $1,984 | $313 | $346,051 |
| Month 60 (Yr 5) | $2,297 | $1,956 | $341 | $332,450 |
| Month 120 (Yr 10) | $2,297 | $1,902 | $395 | $313,840 |
| Month 180 (Yr 15) | $2,297 | $1,820 | $477 | $290,020 |
| Month 240 (Yr 20) | $2,297 | $1,695 | $602 | $257,460 |
| Month 300 (Yr 25) | $2,297 | $1,494 | $803 | $210,230 |
| Month 360 (Yr 30) | $2,297 | $13 | $2,284 | $0 |
Example: $350,000 loan at 6.82%, 30-year fixed. Numbers rounded.
In the first year, paying one extra principal payment of $309 eliminates an entire scheduled payment from your loan term. That $309 saves you paying full interest on that $309 for the remaining 29 years — approximately $645 in interest avoided. Every dollar of extra principal in early years saves nearly $2 in total interest.
| Extra Payment | Payoff Reduction | Interest Saved |
|---|---|---|
| $100/month | ~4 years | ~$72,000 |
| $200/month | ~7 years | ~$121,000 |
| $500/month | ~12 years | ~$197,000 |
| 1 extra payment/year | ~5 years | ~$82,000 |