How Mortgage Amortization Works
Amortization is how a fixed mortgage payment pays off the loan over time. The payment stays the same, but the share going to interest shrinks every month while the share paying down your balance grows. Here is how that works, with real numbers.
The monthly payment formula
Lenders use M = P × r ÷ (1 − (1 + r)^−n). P is the amount borrowed, r is the yearly rate divided by 12, and n is the number of payments. For $400,000 at 6.5% over 30 years, r = 0.065 ÷ 12 = 0.0054167 and n = 360, which gives a payment of $2,528.27.
Each month the lender charges interest on the balance you still owe: balance × r. Whatever is left of the payment reduces the balance. Next month's interest is a little smaller because the balance is smaller, so a little more goes to principal.
Worked example: the first three payments
| Payment | Starting balance | Interest (balance × 0.0054167) | Principal | New balance |
|---|---|---|---|---|
| 1 | $400,000.00 | $2,166.67 | $361.61 | $399,638.39 |
| 2 | $399,638.39 | $2,164.71 | $363.56 | $399,274.83 |
| 3 | $399,274.83 | $2,162.74 | $365.53 | $398,909.30 |
In the first payment, 86% of your money goes to interest. The principal portion grows by about $2 a month at first, then faster as the balance falls.
The whole 30 years at a glance
| End of year | Balance left | Interest paid so far | Share of payment to principal |
|---|---|---|---|
| 1 | $395,529 | $25,868 | 15% |
| 5 | $374,444 | $126,140 | 20% |
| 10 | $339,105 | $242,497 | 27% |
| 15 | $290,237 | $345,326 | 38% |
| 20 | $222,661 | $429,446 | 52% |
| 25 | $129,217 | $487,698 | 72% |
| 30 | $0 | $510,178 | 99% |
Two things stand out. After 10 years of payments you have paid off only about 15% of the loan. And principal does not overtake interest until payment 233, in year 20. This is why the early years of a mortgage build equity slowly, and why selling or refinancing early means most of what you paid was interest.
Three ways to pay less interest
- Choose a shorter term. The same loan over 15 years costs $3,484.43 a month but only $227,197 in interest, about $283,000 less.
- Pay extra toward principal. Extra money skips the interest calculation entirely and lowers every future interest charge. Early extra payments save the most.
- Get a lower rate. On this loan, each 0.5% of rate changes the payment by roughly $130 a month.
Your full monthly cost also includes property tax, insurance, HOA dues and sometimes PMI, which do not reduce the balance at all. The Mortgage Calculator adds those in and builds the full schedule for your own numbers.