Amortization is the process of paying off a loan through regular installment payments. For mortgages, each payment covers interest first, then principal. This front-loading of interest is intentional — it ensures the lender is compensated even if you sell or refinance early.
How Each Payment Is Calculated
Monthly interest = Remaining balance × (Annual rate ÷ 12). On a $350,000 mortgage at 7%: Month 1 interest = $350,000 × (7%÷12) = $2,042. If total payment is $2,329, principal reduction = $287. Month 2 balance = $349,713. Interest = $2,040. Principal = $289. The principal portion grows by roughly $2/month at first, accelerating over time.
Amortization by Year on $350k at 7%
- •Year 1: Pay $27,948 total. $24,463 interest (87.5%), $3,485 principal (12.5%)
- •Year 5: Pay $27,948 total. $23,576 interest (84%), $4,372 principal (16%)
- •Year 10: Pay $27,948 total. $22,202 interest (79%), $5,746 principal (21%)
- •Year 20: Pay $27,948 total. $17,671 interest (63%), $10,277 principal (37%)
- •Year 29: Pay $27,948 total. $1,960 interest (7%), $25,988 principal (93%)
How Extra Principal Payments Beat the Schedule
- •$100/month extra: Saves ~$40,000 in interest, pays off 4 years early
- •$250/month extra: Saves ~$82,000, pays off 7 years early
- •One extra payment/year: Saves ~$56,000, pays off 5 years early
- •Apply windfalls (tax refunds, bonuses) directly to principal — each dollar eliminates the interest it would have accrued over remaining loan life
When making extra principal payments, call or write "apply to principal" on the check or in the payment notes. Otherwise some servicers apply the overage to next month's payment, which doesn't reduce the balance the same way.
The first 7 years of a 30-year mortgage are when extra payments have the highest impact — because you're eliminating interest that would have compounded for decades. Front-load your extra payments as much as possible.