How amortization works: where each mortgage payment goes

Why the early years are interest-heavy

Each month, interest is calculated on the balance you still owe. At the start, that balance is the full loan, so interest takes the biggest share of the payment. The rest pays down principal. Next month the balance is a little lower, so interest is a little lower, and a little more goes to principal. The CFPB notes that near the end of the loan, you owe much less interest and most of your payment pays off the last of the principal.

The part that goes to principal builds equity. The part that goes to interest does not, which is why the CFPB points out that the equity you build is much less than the sum of your payments, especially early.

Reading a schedule

An amortization schedule lists each payment with its interest, principal and remaining balance. Your Loan Estimate gives a shortcut: page 3 shows how much principal you will have paid off in five years, along with the total you will have paid in principal, interest, mortgage insurance and loan costs. Comparing that figure across offers shows how quickly each loan builds equity.

How the term changes the picture

A shorter term means a higher monthly payment but faster principal reduction and much less total interest. On Marco's loan, total interest over 30 years is about $382,633. A 15-year loan would front-load far more principal, though the payment would be much higher. Our 15- versus 30-year guide covers that trade-off.

Extra principal payments

Money paid toward principal above the scheduled amount lowers your balance right away, so every later payment carries less interest. In Marco's case, adding $100 a month to principal from the start would pay the loan off in about 26 years instead of 30 and save roughly $61,000 in interest, by our calculation. A lump sum early in the loan has a bigger effect than the same sum late.

Before paying extra, check with your servicer how to label the payment so it goes to principal, and check your loan documents. Your Loan Estimate and note show whether a prepayment penalty applies.

Loans that do not amortize normally

Not every mortgage follows a standard schedule. The CFPB describes interest-only periods, where payments cover only interest, and negative amortization, where the balance can grow even while you pay. Both are excluded from qualified mortgages. With an adjustable-rate mortgage, the schedule is recalculated when the rate changes.

Amortization and mortgage insurance

On conventional loans, private mortgage insurance can be removed once your balance reaches certain levels compared with the home's original value. Your amortization schedule shows when that is likely to happen, and extra principal payments can bring it forward.

The bottom line

Amortization explains why your balance falls slowly at first and faster later. Use your schedule or the calculator to see the split, check page 3 of your Loan Estimate for five-year principal paid and consider extra principal payments if your loan allows them.