Mortgage Amortization Explained: How Your Payments Work

Mortgage amortization is the process of paying off your loan through scheduled payments that cover both principal and interest. Each payment is the same amount, but the split changes over time. In a 30-year mortgage at 6.5%, your first payment is 86% interest and 14% principal. By year 25, it flips to 25% interest and 75% principal. Understanding amortization helps you see where your money goes and how to build equity faster.

How Amortization Works

The Basic Concept

With amortization:

Total payment stays the same each month
Interest portion decreases over time
Principal portion increases over time
Loan is fully paid at the end of the term

Why Payments Are Structured This Way

Interest is calculated on your remaining balance. Early on:

Balance is highest
Interest calculation is largest
Less left over for principal

As balance decreases:

Interest calculation shrinks
More of your payment goes to principal
Equity builds faster

Simple Example

$300,000 loan at 6.5% for 30 years:

Monthly payment: $1,896

First payment:

Interest: $1,625 (86%)
Principal: $271 (14%)
Remaining balance: $299,729

Payment after 15 years:

Interest: $935 (49%)
Principal: $961 (51%)
Remaining balance: $205,000

Payment in year 29:

Interest: $145 (8%)
Principal: $1,751 (92%)
Remaining balance: $20,000

Reading an Amortization Schedule

What It Shows

An amortization schedule lists every payment over your loan term:

Payment #	Payment	Principal	Interest	Balance
1	$1,896	$271	$1,625	$299,729
2	$1,896	$272	$1,624	$299,457
3	$1,896	$274	$1,622	$299,183
…	…	…	…	…
359	$1,896	$1,876	$20	$1,886
360	$1,896	$1,886	$10	$0

Key Observations

Early years: Most goes to interest, balance drops slowly

Middle years: Split becomes more even

Later years: Most goes to principal, balance drops quickly

Finding Your Schedule

Request from your lender
Generate online (many free calculators)
Your loan documents include one
Your servicer portal may show it

Amortization by Loan Term

30-Year Amortization

$300,000 at 6.5%:

Year	Principal Paid	Interest Paid	Remaining Balance
1	$3,415	$19,337	$296,585
5	$19,601	$94,219	$280,399
10	$47,000	$181,560	$253,000
15	$86,500	$255,540	$213,500
20	$143,000	$313,080	$157,000
30	$300,000	$382,633	$0

Total interest over 30 years: $382,633

15-Year Amortization

$300,000 at 5.75%:

Year	Principal Paid	Interest Paid	Remaining Balance
1	$15,100	$16,852	$284,900
5	$90,200	$69,552	$209,800
10	$211,000	$107,952	$89,000
15	$300,000	$149,280	$0

Total interest over 15 years: $149,280

Savings vs 30-year: $233,353

Comparison Insight

With a 15-year loan:

You pay $600 more monthly
You save $233,000 in interest
You own your home in half the time
More of each payment builds equity

The Impact of Interest Rate

Same Loan, Different Rates

$350,000 loan, 30 years:

Rate	Payment	Total Interest	Year 1 Interest %
5.0%	$1,879	$326,395	78%
6.0%	$2,098	$405,434	82%
7.0%	$2,329	$488,281	85%
8.0%	$2,568	$574,512	88%

Higher rates mean:

Higher total interest paid
Slower equity building early on
More of each payment going to interest

Extra Payments and Amortization

How Extra Payments Help

Extra payments go directly to principal, immediately:

Reducing your balance
Reducing future interest
Shortening your payoff time

Example: $200 Extra Monthly

$300,000 at 6.5%, adding $200/month:

Scenario	Payoff Time	Total Interest
Standard	30 years	$382,633
+$200/month	23.5 years	$278,000
Savings	6.5 years	$104,633

Where the Savings Come From

When you pay extra principal:

Balance drops immediately
Next month’s interest is calculated on lower balance
More of next payment goes to principal
Effect compounds over time

One-Time Extra Payment Example

Make one $5,000 extra payment in year 3:

Without extra payment:

Total interest: $382,633
Payoff: 30 years

With $5,000 extra in year 3:

Total interest: $366,000
Payoff: 29 years
Savings: $16,633 and 1 year

One payment saved over $16,000 because it prevented interest from compounding for 27 years.

Negative Amortization

What It Is

Negative amortization occurs when your payment doesn’t cover the interest due. The unpaid interest is added to your balance—you owe more over time, not less.

When It Happens

Payment option ARMs: Allow minimum payments below interest

Some adjustable loans: Payments may not cover interest when rates spike

Deferred interest programs: Interest accrues but isn’t required

Why It’s Dangerous

Balance grows instead of shrinks
You can end up owing more than you borrowed
May owe more than home is worth
Very expensive long-term

Avoid loans with negative amortization features.

Interest-Only Periods

How They Work

Some loans have interest-only periods:

Pay only interest for 5-10 years
Principal stays unchanged
After period ends, payments jump significantly

Example

$300,000 loan at 6.5%:

Interest-only period (years 1-10):

Payment: $1,625 (interest only)
Balance after 10 years: $300,000 (unchanged)

After interest-only ends (years 11-30):

Payment: $2,275 (20-year amortization of full balance)
Payment increase: $650/month

When Interest-Only Makes Sense

Potentially useful:

Investors expecting to sell quickly
High earners with irregular income
Bridge financing situations

Usually not recommended:

Building no equity for years
Payment shock when it ends
Costs more in total interest

Amortization for ARMs

During Fixed Period

ARMs amortize normally during the fixed period:

Standard principal + interest split
Balance decreases as expected

After Adjustment

When rate adjusts:

Payment recalculates based on new rate and remaining term
Higher rate = more to interest
Amortization schedule changes

Example: 5/1 ARM

$300,000 at 5.5% (initial), adjusts to 7.5% in year 6:

Period	Rate	Payment	Interest %
Years 1-5	5.5%	$1,703	~80%
Years 6+	7.5%	$2,064	~85%

The rate increase:

Raises payment by $361
Increases interest portion
Slows equity building

Using Amortization to Your Advantage

Front-Load Extra Payments

Extra payments have the most impact early in the loan when your balance is highest.

$1,000 extra in year 1: Saves $3,000+ in interest

$1,000 extra in year 25: Saves only a few hundred

Consider Shorter Terms

If you can afford it, a 15 or 20-year loan:

Builds equity faster from day one
Forces you to pay principal
Often comes with lower rates

Refinance to Shorter Term Later

If you couldn’t afford a 15-year initially, consider refinancing once income increases:

Accelerate remaining amortization
Lock in lower rate (potentially)
Build equity faster

Avoid Extending Amortization

Each refinance can restart the clock:

10 years into a 30-year → refinance to new 30-year
You’re back to mostly-interest payments
Total homeownership: 40 years instead of 30

If refinancing, consider matching or shortening remaining term.

Frequently Asked Questions

What is mortgage amortization?

Amortization is the process of paying off a loan through regular payments that cover both interest and principal. Each payment is the same, but the split between interest and principal changes over time.

Why is most of my payment going to interest?

Interest is calculated on your remaining balance. Early in the loan, your balance is highest, so interest is highest. As the balance drops, interest decreases and more goes to principal.

How do I pay less interest over the life of my loan?

Make extra principal payments, choose a shorter loan term or refinance to a lower rate. Even small extra payments early in the loan save significant interest.

What is an amortization schedule?

A table showing every payment over your loan term, breaking down how much goes to principal, how much goes to interest and your remaining balance after each payment.

Does refinancing restart amortization?

Yes. Refinancing creates a new loan with new amortization. You go back to mostly-interest payments. Consider shorter terms when refinancing to avoid adding years.

How long until I’ve paid half my principal?

On a 30-year loan at typical rates, you don’t reach 50% principal paydown until around year 20-22. The first half of the term pays only about 25% of principal.