How amortization works
Key takeaways
04 · ideas- Month 1 of a $300k loan at 7%: $1,750 interest, $246 principal
- By year 15, the split starts shifting toward principal
- Amortization tables show exactly where every dollar goes
- Extra payments applied early affect total interest most significantly
Basic level
The essentials · 2 min
Amortization is the process of paying off a loan through regular scheduled payments over time. Each payment covers two things: the interest owed for that period, and a portion of the original principal.
How the split is calculated:- Interest portion = remaining balance x monthly rate
- Principal portion = fixed payment minus interest portion
- New balance = old balance minus principal paid
With a $300,000 mortgage at 7% (monthly rate: 0.583%), month 1 interest is $1,750. If the fixed monthly payment is $1,996, then $246 goes to principal. The balance drops to $299,754.
Why early payments are mostly interest:
Because the balance is highest at the start, the interest charge is also highest. As the balance slowly falls, more of each payment covers principal. This process accelerates over time.
Intermediate level
How it applies · 2 min
The amortization table
| Month | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $1,996 | $1,750 | $246 | $299,754 |
| 60 | $1,996 | $1,624 | $372 | $278,220 |
| 120 | $1,996 | $1,467 | $529 | $251,375 |
| 180 | $1,996 | $1,263 | $733 | $216,398 |
| 240 | $1,996 | $997 | $999 | $170,201 |
| 360 | $1,996 | $12 | $1,985 | $0 |
Notice how principal payments roughly double over the life of the loan, while interest payments fall steadily.
Extra payments and the amortization schedule
Any extra amount paid reduces the outstanding balance immediately. Because the next month's interest is calculated on the new lower balance, less of future payments goes to interest. Extra payments applied in year 1 affect more remaining months than the same amount applied in year 20.
Advanced level
The math, step by step · 1 min
The mathematics
For principal P, monthly rate r_m, and term n months, the fixed monthly payment is:
The remaining balance after k payments:
For a 30-year, $300k loan at 7%, total interest over the life of the loan is approximately $418,527 — exceeding the original principal.