How amortization really works
Key takeaways
04 · ideas- On a 30-year mortgage at 6%, 82% of the first payment is interest
- You reach 50% equity on a 30-year mortgage after ~22 years
- Extra payments target principal directly, skipping all future interest
- The amortization formula dates to Renaissance-era banking
Basic level
The essentials · 1 min
Amortization means spreading a loan into equal monthly payments over time. Every payment covers two things: interest (the cost of borrowing) and principal (paying back what you owe).
The tricky part: early payments are mostly interest. With a 30-year, $300,000 loan at 6%, your first payment of $1,799 breaks down as:- Interest: $1,500 (6% ÷ 12 months × $300,000)
- Principal: $299 (just 17% of the payment)
- Interest: $800
- Principal: $999
By year 29, it's mostly principal. This is why selling or refinancing in the early years leaves you owing nearly as much as you borrowed.
Intermediate level
How it applies · 2 min
The amortization schedule in detail
$200,000 loan at 6% for 30 years (monthly payment: $1,199):
| Year | Interest paid | Principal paid | Remaining balance |
|---|---|---|---|
| 1 | $11,933 | $2,455 | $197,545 |
| 5 | $11,588 | $2,800 | $186,108 |
| 10 | $10,960 | $3,428 | $168,827 |
| 15 | $9,982 | $4,406 | $146,940 |
| 20 | $8,541 | $5,847 | $117,357 |
| 25 | $6,385 | $8,003 | $76,414 |
| 30 | $2,950 | $11,438 | $0 |
Total interest paid over 30 years: $231,640 — more than the original $200,000 loan.
Front-loading vs. back-loading
Standard amortization is front-loaded with interest by design. This benefits lenders: if you default early, they've already collected substantial interest. It benefits refinancing banks: encouraging you to refinance "resets" the amortization clock, starting the interest-heavy period again.
The equity trap
After 10 years of payments on a $300,000 home with 10% down ($270,000 loan at 6%), you have:- Paid: $143,880 in payments
- Interest paid: ~$109,000
- Principal reduction: ~$34,880
- Remaining balance: ~$235,120
- Equity from payments alone: $34,880
That's 10 years of payments and you've only reduced the loan by 13%. Home appreciation adds equity, but the loan itself barely moves in the early years.
Advanced level
The math, step by step · 1 min
The amortization formula
Monthly payment for loan amount P, monthly interest rate r = R/12, over n months:
Balance after k payments:
The interest component of payment k:
Why extra payments are so powerful: An extra payment E at month k reduces the balance by E, which reduces interest in every subsequent period. The total interest saved by an extra payment of E at month k is:
where n_{remaining} is the approximate number of months the balance would have otherwise remained above that level. For early extra payments with many years remaining, this multiplier can be 10–15×.
Rule of thumb: An extra $100/month payment on a 30-year, $300,000 loan at 6% saves approximately $61,000 in interest and shaves 4.5 years off the loan term.