Mortgage amortization explained: how each payment splits between interest and principal
The short answer
Amortization is the process of paying off a loan with regular payments that first cover the interest owed and then reduce principal. On a $400,000, 30-year mortgage at 7.03%, the first payment of $2,669 includes about $2,343 of interest and only about $326 of principal. The balance falls slowly at first and faster later: after 10 years you would still owe about $343,500.
Key numbers
- Payment on $400,000 at 7.03% for 30 years
- $2,669
- Month-one interest / principal
- $2,343 / $326
- Total interest over 30 years
- about $560,900
- Balance after 10 years
- about $343,500
What does amortization mean?
To amortize a loan is to pay it off gradually through scheduled payments. With a fixed-rate mortgage, the total payment of principal and interest stays the same, but the split between the two shifts every month. In the early years most of the payment goes to interest; near the end most goes to principal. A table listing every payment, how much is interest, how much is principal, and the remaining balance is an amortization schedule.
Why is so much of the early payment interest?
Interest is charged on the balance you owe. At the start, the balance is at its highest, so the interest is at its highest. Your payment first covers that month's interest, and whatever is left reduces principal. The next month's balance is a little smaller, so a little less interest is charged, and slightly more goes to principal. The effect compounds over time.
Monthly rate = 7.03% ÷ 12 = 0.5858%. Interest = $400,000 × 0.5858% = $2,343.33. The payment is $2,669.27, so principal is $2,669.27 − $2,343.33 = $325.94. Only about 12% of the first payment reduces your balance.
How the balance falls over 30 years
| After | Total principal paid | Remaining balance |
|---|---|---|
| 1 year | $4,040 | $395,960 |
| 5 years | $23,353 | $376,647 |
| 10 years | $56,509 | $343,491 |
| 15 years | $103,581 | $296,419 |
| 20 years | $170,411 | $229,589 |
| 25 years | $265,293 | $134,707 |
| 30 years | $400,000 | $0 |
In the first year you pay about $32,000 in total payments, of which about $28,000 is interest and about $4,000 is principal. You do not pay off half of the loan until around year 22. Over the full 30 years, you pay about $560,900 in interest, more than the amount you borrowed.
This is why selling or refinancing early in a mortgage builds little equity from paying down the loan. Most early equity comes from your down payment and from home price appreciation.
The formula behind the payment
The fixed monthly payment on a standard mortgage is:
Payment = L × r ÷ (1 − (1 + r)−n)
where L is the loan amount, r is the monthly interest rate (annual rate ÷ 12), and n is the number of payments (years × 12). Lenders use exactly this calculation. You can test it in the payment calculator.
How do extra payments change the schedule?
Any extra money you pay toward principal reduces the balance right away, so all future interest is calculated on a smaller amount. Because most of a mortgage's interest is charged in the early years, extra payments made early have the biggest effect.
| On a $400,000 loan at 7.03% | Time to pay off | Total interest | Interest saved |
|---|---|---|---|
| Regular payment ($2,669) | 30 years | $560,900 | Baseline |
| Add $200 a month | 24 years, 3 months | $433,400 | $127,500, and 69 months sooner |
| Add $500 a month | 19 years, 3 months | $329,600 | $231,300, and 129 months sooner |
When you make an extra payment, tell your servicer to apply it to principal, since some servicers otherwise treat it as a prepayment of the next installment. Check whether your loan has a prepayment penalty, which is rare on modern conventional, FHA, VA, and USDA mortgages. A payment of half your monthly amount every two weeks results in 26 half-payments a year, equal to 13 full payments, and works like adding about one-twelfth to each payment.
15-year vs. 30-year amortization
A shorter term amortizes faster, because a larger part of each payment goes to principal from the start.
| $400,000 loan | 30-year at 7.03% | 15-year at 6.42% |
|---|---|---|
| Monthly principal and interest | $2,669 | $3,467 |
| Month-one interest | $2,343 | $2,140 |
| Month-one principal | $326 | $1,327 |
| Total interest | $560,900 | $224,000 |
The 15-year loan costs about $798 more per month but saves about $336,900 in interest. Its lower rate contributes, but the shorter term is the main reason.
What is negative amortization and interest-only?
- Interest-only loans require only interest for a period, so principal does not fall. The payment jumps when the interest-only period ends. HELOCs work this way in their draw period. HELOC vs. home equity loan.
- Negative amortization happens when payments are less than the interest owed, so the balance grows. Most modern "qualified mortgages" do not allow it.
How amortization affects refinancing
When you refinance, you start a new amortization schedule, and the early years are again mostly interest. If you are seven years into a 30-year loan and refinance into a new 30-year, you have effectively given up progress on principal, which can raise your total interest even if the rate is lower. Compare total interest, not just the monthly payment. The break-even guide explains how.
How to read your mortgage statement
- Principal balance: what you still owe, not counting interest.
- Interest and principal portions: how your last payment was split.
- Escrow: the part that goes to taxes and insurance. Escrow explained.
- Payoff amount: the exact amount needed to pay off the loan on a given date, which includes accrued interest.
Year by year: how the split changes
This table shows the first five years of the $400,000 loan at 7.03%. The total paid each year is $32,031.
| Year | Interest paid | Principal paid | Balance at year end |
|---|---|---|---|
| 1 | $27,991 | $4,040 | $395,960 |
| 2 | $27,698 | $4,333 | $391,627 |
| 3 | $27,384 | $4,648 | $386,979 |
| 4 | $27,046 | $4,985 | $381,994 |
| 5 | $26,684 | $5,347 | $376,647 |
Over five years you pay about $160,000 in total payments, of which about $137,000 is interest and only about $23,400 is principal.
Extra payments, recasting, or refinancing?
| Option | What it does | Best when |
|---|---|---|
| Extra monthly principal | Shortens the loan and cuts interest, and payment stays the same | You want flexibility and can skip extra payments in tight months |
| Recast | Lump sum reduces the balance and the lender recalculates a lower payment on the same rate and term | You received a windfall and want a lower payment without refinancing |
| Refinance | New rate, term, and costs | The rate has fallen enough to pay back closing costs |
After five years on the $400,000 loan, your balance is about $376,600. A $50,000 lump-sum recast would drop the balance to about $326,600 and reduce the payment on the remaining 25 years from $2,669 to about $2,315, saving about $354 a month at the same 7.03% rate. Recast fees are typically a few hundred dollars, and not all loans qualify (government-backed loans generally do not).
Should you pay extra?
Paying extra principal earns a guaranteed return equal to your mortgage rate, which is attractive at 7%. But first consider higher-interest debt, an emergency fund, and any employer retirement match, which usually beats mortgage prepayment. A common order is: emergency fund, high-interest debt, employer match, then extra mortgage payments and other goals. If you have a low-rate mortgage from earlier years, other uses of cash may pay more.
Frequently asked questions
What is an amortization schedule?
A table that shows every payment on a loan, the portion applied to interest and principal, and the remaining balance.
Why does my balance barely go down in the first years?
Because early payments are mostly interest. On a $400,000 loan at 7.03%, only about $4,000 of principal is paid in the first year.
Do extra payments really save that much?
Yes. Adding $200 a month to a $400,000 loan at 7.03% saves about $127,500 in interest and shortens the loan by about six years.
What is a recast?
Paying a lump sum toward principal and asking the lender to recalculate a lower payment on the same rate and remaining term, usually for a small fee.
Does a biweekly payment plan help?
It results in one extra full payment a year, which shortens the loan. You can get the same effect by adding one-twelfth of your payment each month.