Understanding Amortization: Where Your Mortgage Payment Really Goes
If you've ever looked at a mortgage statement and wondered why the principal portion of your payment is so small, you've bumped into amortization. It's the simple math that determines how a fixed monthly payment is split between interest (going to the bank) and principal (reducing what you owe).
The math in one paragraph
Each month, the bank charges interest on whatever you still owe. That interest is calculated by multiplying your remaining balance by 1/12th of your annual rate. The leftover portion of your payment knocks down principal. Because principal goes down every month, next month's interest is slightly lower — and the share going to principal grows. By the last year of a 30-year mortgage, almost every dollar reduces principal. In year one, it's the opposite.
Why this matters
- Equity builds slowly at first. Five years in on a 30-year loan, you may have paid off less than 10% of the original balance.
- Extra payments are turbocharged. An extra dollar of principal today saves you interest on that dollar for the entire remaining life of the loan.
- Refinancing resets the clock. A new 30-year mortgage starts you over at the high-interest end of the curve, even if your rate is lower.
Try it
Use our Mortgage Calculator with the "Extra Monthly Payment" field. Add $200/month to a typical 30-year loan and watch the chart pull in dramatically — both in time to payoff and total interest paid.