How mortgage amortization works
A fully amortizing mortgage is designed so that a constant monthly payment retires the entire balance by the end of the term. Behind that constant payment, the split between interest and principal shifts every single month.
The monthly interest is simply the outstanding balance times the monthly rate. Whatever is left of the payment goes to principal. Since the balance is largest at the outset, early payments are dominated by interest; the principal share climbs steadily until the final year, when nearly all of each payment reduces the loan.
Reading the yearly schedule
Each row summarizes a full year: the principal you retired, the interest you paid and the balance left at year end. Add the principal and interest columns across all years and you get the total of payments shown above.
The donut chart condenses that into one picture — total principal versus total interest over the life of the loan. The balance line traces the year-end balances falling toward zero, making the slow-then-fast payoff curve easy to see.
Using amortization to your advantage
Knowing the breakdown helps you plan extra payments and compare options.
- Any extra principal payment skips ahead on the schedule, erasing all the future interest that balance would have generated.
- Front-loaded interest is why refinancing late in a loan saves less than it seems.
- Use the year-end balance to gauge equity if you might sell or refinance.
- Compare two terms by reading total interest off each schedule before you commit.
Formula
r = annualRate/100/12; n = years×12; payment = P·r·(1+r)ⁿ / ((1+r)ⁿ − 1)Frequently asked questions
- Why is so much of my early payment interest?
- Interest is charged on the outstanding balance, which is highest at the start. As the balance falls, the interest portion shrinks and more of each payment reduces principal.