Amortization Explained
Amortization is the mathematical process that ensures you pay off your loan in exactly 360 equal payments.
The word "amortization" comes from Latin meaning "to kill" or "to extinguish." Your mortgage is amortized—designed to be completely extinguished by your final payment. This guide explains how amortization works, why your payment stays constant while the principal/interest split changes dramatically, and how understanding this empowers better financial decisions.
What you'll learn:
The definition and purpose of amortization
Why payments stay constant but ratios change
How amortization schedules are calculated
The acceleration effect in later years
How extra payments disrupt the schedule
Common amortization myths debunked
What Is Amortization?
Amortization: The process of paying off debt through regular, equal payments over a set period.
Key Characteristics
The Amortization Formula
Lenders use a mathematical formula to calculate your monthly payment:
Monthly Payment Formula
Example Calculation
Loan details:
Principal (P): $378,000
Annual rate: 5.625%
Monthly rate (r): 0.05625 ÷ 12 = 0.0046875
Payments (n): 30 years × 12 = 360
Calculate:
Your monthly payment: $2,175.98 for all 360 months.
How Payment Allocation Works
Every month, the lender:
Payment #1 Breakdown
Balance: $378,000 Interest: ($378,000 × 0.05625) ÷ 12 = $1,771.88 Payment: $2,175.98 Principal: $2,175.98 - $1,771.88 = $404.10 New balance: $378,000 - $404.10 = $377,595.90
Payment #2 Breakdown
Balance: $377,595.90 Interest: ($377,595.90 × 0.05625) ÷ 12 = $1,770.07 Payment: $2,175.98 Principal: $2,175.98 - $1,770.07 = $405.91 New balance: $377,595.90 - $405.91 = $377,189.99
The pattern emerges: Lower balance → Lower interest → Higher principal (but same total payment).
The 30-Year Amortization Journey
Early Years (Years 1-10): Interest-Heavy
Payment #1:
Principal: $404.10 (18.6%)
Interest: $1,771.88 (81.4%)
Payment #60 (Year 5):
Principal: $524.21 (24.1%)
Interest: $1,651.77 (75.9%)
Payment #120 (Year 10):
Principal: $682.63 (31.4%)
Interest: $1,493.35 (68.6%)
Why: You owe a large balance, generating massive interest charges. Most of your payment covers interest.
Middle Years (Years 10-20): Transitioning
Payment #180 (Year 15):
Principal: $887.42 (40.8%)
Interest: $1,288.56 (59.2%)
Payment #240 (Year 20):
Principal: $1,148.81 (52.8%)
Interest: $1,027.17 (47.2%)
Why: Balance has decreased substantially. Interest charges are moderate. Principal is accelerating.
Late Years (Years 20-30): Principal-Heavy
Payment #300 (Year 25):
Principal: $1,477.01 (67.9%)
Interest: $698.97 (32.1%)
Payment #340 (Year 28.3):
Principal: $1,874.51 (86.1%)
Interest: $301.47 (13.9%)
Payment #360 (Year 30, final):
Principal: $2,128.38 (97.8%)
Interest: $47.60 (2.2%)
Why: Balance is tiny, generating minimal interest. Nearly your entire payment attacks principal.
Why Fixed Payment, Changing Ratio?
The mathematical principle: Your payment is calculated to fully amortize (pay off) the loan in exactly n payments.
The Balance
Each month, two forces are at work:
Interest accrual
Your balance generates interest
This interest must be paid
Interest charge = Balance × Monthly rate
Principal reduction
Whatever's left after paying interest reduces your balance
Principal payment = Fixed payment - Interest
As balance decreases:
Interest charges shrink
More of your fixed payment goes to principal
Principal payments accelerate
Balance decreases faster
Interest charges shrink even more
Compounding acceleration
The Acceleration Effect
Key insight: Principal reduction accelerates naturally over the loan life.
Balance Reduction Per Year
Year 1-5:
Average principal paid per year: ~$5,200
Balance drops from $378,000 to $352,485
Year 10-15:
Average principal paid per year: ~$8,700
Balance drops from $318,740 to $275,043
Year 20-25:
Average principal paid per year: ~$14,000
Balance drops from $219,256 to $149,181
Year 25-30:
Average principal paid per year: ~$29,800
Balance drops from $149,181 to $0
Same monthly payment throughout, but principal reduction accelerates dramatically.
Reading an Amortization Schedule
An amortization schedule shows all 360 payments in table format.
Standard Columns
Payment #: Sequential number (1-360)
Date: Month and year of payment
Payment: Your fixed monthly amount ($2,175.98)
Principal: Amount reducing your balance
Interest: Amount paid to lender
Balance: Remaining principal after this payment
Cumulative Interest: Total interest paid through this payment
Cumulative Principal: Total principal paid through this payment
Example Rows
How Extra Payments Disrupt Amortization
Extra payments break the predetermined schedule by reducing principal faster than planned.
Standard Amortization (No Extras)
Payment #93:
Balance before: $205,750
Interest: $964.22
Principal: $1,211.76
Balance after: $204,538.24
Payment #94:
Balance before: $204,538.24
Interest: $958.56
Principal: $1,217.42
Balance after: $203,320.82
With $500 Extra at Payment #93
Payment #93:
Balance before: $205,750
Interest: $964.22
Principal: $1,211.76
Extra: $500.00
Balance after: $204,038.24 (instead of $204,538.24)
Payment #94:
Balance before: $204,038.24 (lower by $500)
Interest: $956.22 (saved $2.34 vs standard)
Principal: $1,219.76 (higher by $2.34 vs standard)
Balance after: $202,818.48
Effect: Every future payment has lower interest and higher principal than the original schedule.
Schedule Compression
Without extras: 360 payments total
With $500 extra at payment #93: 358 payments total (2 fewer payments needed)
Why: The $500 plus cascading interest savings eliminate the need for the final 2 payments.
Amortization Myths Debunked
Myth #1: "Banks front-load interest"
Claim: Banks intentionally charge more interest early.
Truth: Interest is calculated mathematically based on your balance. Early payments are mostly interest because you owe a lot of principal. Banks don't "front-load" anything—math does.
Myth #2: "My payment should decrease as I pay down principal"
Claim: As balance drops, payments should drop too.
Truth: Amortized loans have fixed payments. The principal/interest split changes, but total payment stays constant. This ensures you pay off in exactly 30 years.
Myth #3: "Refinancing resets amortization, so I should never refinance"
Claim: Refinancing restarts the 81% interest phase, so it's always bad.
Truth: Refinancing might be beneficial despite restarting amortization if:
New rate is significantly lower
You'll recoup closing costs through savings
You plan to stay in the home long enough
Calculate specific numbers for your situation.
Myth #4: "Bi-weekly payments trick the bank"
Claim: Paying half your payment every two weeks "tricks" the amortization schedule.
Truth: Bi-weekly payments may only work if your lender immediately applies the payments to the loan, and doesnt wait for the full amount to apply. Confirm if your lender does that before setting up a biweekly mortgage.
Types of Amortization
Fully Amortizing Loans (Standard Mortgages)
Characteristic: Fixed payments, balance reaches $0 at end of term. Examples: 30-year fixed, 15-year fixed, 20-year fixed Benefit: Predictable, guaranteed payoff date
Partially Amortizing Loans (Balloon Mortgages)
Characteristic: Smaller payments based on longer term, but large balloon payment due at end.
Example: "30-year amortization, 7-year balloon"
Payments calculated as if 30-year loan
But entire remaining balance due after 7 years
Risk: Must refinance or pay balloon. If rates are high or you can't qualify, you're forced to sell.
Negative Amortization Loans (Rare)
Characteristic: Payments don't cover interest, so balance grows.
Example: Some adjustable-rate mortgages with payment caps
Risk: You owe more than you borrowed. Extremely dangerous.
PayOff Pro: Designed for standard fully-amortizing loans only.
Comparing Amortization Schedules
30-Year vs 15-Year
Same loan: $378,000 at 5.625%
30-year:
Payment: $2,175.98
Total paid: $783,353
Total interest: $405,353
15-year:
Payment: $3,091.19
Total paid: $556,414
Total interest: $178,414
Difference: 15-year saves $226,939 in interest but requires $915.21 higher monthly payment.
Standard Schedule vs Accelerated (With Extras)
Same 30-year loan with $200/month extra:
Standard:
Payments: 360
Total interest: $405,353
Payoff: Year 30
Accelerated:
Payments: 286
Total interest: $301,530
Payoff: Year 23.8
Impact: Saves $103,823 and 6.2 years by paying just $200/month extra.
Key Insights
Amortization ensures equal payments through mathematical calculation, not bank manipulation.
Principal accelerates naturally as interest charges decline with your shrinking balance.
Early years are interest-heavy because interest is calculated on a large balance.
Late years are principal-heavy because interest is calculated on a small balance.
Extra payments compress the schedule by reducing balance faster, eliminating future payments.
The acceleration is exponential in later years, where monthly principal paid can be 4–5× higher than early years.
Related Topics
Mortgage Interest Understanding interest calculation reveals why amortization schedules work this way.
Learn more: How Mortgage Interest Works →
Payment Schedule See your complete amortization schedule with all 360 payments.
Learn more: Payment Schedule →
True Cost Calculate total interest paid over your loan's amortization period.
Learn more: True Cost of Borrowing →
Amortization Is Predictable Mathematics
Amortization isn't a bank scheme—it's a mathematical system ensuring you pay off your loan in exactly n equal payments.
Understanding amortization empowers you to:
Predict exactly how each payment is allocated
Understand why early extra payments save the most
Calculate your own payoff scenarios
Verify your lender's schedule is accurate
Make informed refinancing decisions
PayOff Pro uses standard amortization formulas to project your exact payoff trajectory—no hidden surprises, just transparent mathematics.
← Back to Extra Payments Matter | Continue to True Cost of Borrowing →
Last Updated: 2025-10-16 Guide Version: 1.0 App Version: PayOff Pro v1.0
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