Mortgage Amortization Explained: How Your Payments Are Split

What Is Mortgage Amortization?

Mortgage amortization is the process by which your monthly mortgage payment is split between principal and interest. Each payment you make goes partly toward paying down the loan balance (principal) and partly toward the cost of borrowing (interest).

In a fixed-rate mortgage, the combined principal and interest payment stays the same every month for the life of the loan. However, the portion that goes to interest decreases over time while the portion that goes to principal increases. This happens because interest is calculated on the remaining loan balance, which declines as you make payments.

Sources: Consumer Financial Protection Bureau, Zillow, Ramsey Solutions, Bankrate, Investopedia

How Amortization Schedules Work

An amortization schedule is a table that lists each monthly payment over the life of the loan. For each payment, it shows the breakdown into interest and principal, the remaining balance after the payment, and sometimes the cumulative interest paid to date.

The schedule is built using the standard amortization formula. The monthly payment M is calculated as M = P × [r(1+r)^n] / [(1+r)^n - 1], where P is the principal loan amount, r is the monthly interest rate (annual rate divided by 12), and n is the total number of payments. Once the payment is fixed, each month’s interest is computed by multiplying the current balance by r. The rest of the payment reduces the principal.

• Early payments: a larger portion goes to interest.
• Later payments: a larger portion goes to principal.
• The total payment stays constant for a fixed-rate loan.

Sources: Ramsey Solutions, Bankrate, Investopedia, Chase

Sample Amortization Schedules for 15- and 30-Year Loans

The following examples illustrate how amortization works for different loan terms. Note that the loan amounts and interest rates differ between the two examples, so they are not directly comparable as a side-by-side comparison, but they show the typical structure of a 15-year and a 30-year fixed-rate mortgage.

The table below shows the first few payments and then jumps to the halfway point and the final payment to illustrate the trend.

For the 15-year example, we use a $240,000 loan at 5.5% interest with a monthly payment of $1,961. The table below shows the first few payments and the final payment.

Sources: Zillow, Ramsey Solutions, Chase

Impact of Extra Payments on Amortization

Making extra payments toward the principal can have a significant effect on your amortization schedule. When you pay extra, that amount goes directly to reduce the loan balance, which means less interest accrues in future months. As a result, you will pay less total interest over the life of the loan and pay off the loan sooner than the original term.

• Reduce total interest paid.
• Shorten the loan term.
• The sooner you make extra payments, the greater the impact.

Sources: Zillow, Ramsey Solutions

How to Read an Amortization Table

An amortization table typically has columns for payment number, payment amount, interest paid, principal paid, and remaining balance. To read it, start at the top. For the first payment, you will see a large interest portion and a small principal portion. As the schedule progresses, the interest portion gradually decreases, and the principal portion increases. The remaining balance shows the outstanding loan amount after each payment, and by the end of the term, the balance reaches zero.

• Payment number: the sequence of payments (e.g., 1, 2, 3...).
• Interest paid: the portion of the payment that goes to interest.
• Principal paid: the portion that reduces the loan balance.
• Remaining balance: the loan amount still owed after the payment.

Sources: Zillow, Bankrate, Investopedia, Ramsey Solutions