An amortization schedule is a table showing every payment on a loan broken into principal and interest. Understanding it reveals a crucial fact: in the early years of a mortgage, the vast majority of your payment goes to interest, not to paying down what you owe.
How Amortization Works
M = P × [r(1+r)^n] / [(1+r)^n − 1] Where P = principal, r = monthly rate, n = total payments. This produces a fixed payment where the interest-to-principal ratio shifts over time.
Each month, interest is calculated on the remaining balance. In month one of a $300,000 mortgage at 7%, the interest charge is $1,750. If the total payment is $1,996, only $246 reduces principal. By the final year, nearly the entire payment goes to principal.
The Front-Loading Problem
| Year | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $23,952 | $20,870 | $3,082 | $296,918 |
| 5 | $23,952 | $19,916 | $4,036 | $283,727 |
| 15 | $23,952 | $15,354 | $8,598 | $219,352 |
| 25 | $23,952 | $6,774 | $17,178 | $89,590 |
| 30 | $23,952 | $1,108 | $22,844 | $0 |
Based on $300,000 at 7% for 30 years. Total interest paid: $418,527. Generate yours with the Amortization Calculator.
The Power of Extra Payments
Extra payments go entirely to principal, reducing the balance that future interest is calculated on. Adding just $200 per month saves $87,000 in interest and pays off the loan 7 years early. Even one extra payment per year can cut 4–5 years off a 30-year mortgage.
15 vs 30 Year Comparison
A 15-year mortgage on $300,000 at 6.5% has a payment of $2,613 compared to $1,896 for 30 years at 7%. The monthly cost is $717 more, but you save $250,000+ in total interest. Use the Mortgage Calculator to compare.
Key Takeaways
- Early payments are mostly interest — 87% in year one of a typical mortgage.
- Extra payments go directly to principal, saving interest for every remaining month.
- $200/month extra on a $300k mortgage saves ~$87,000 and 7 years.
- Bi-weekly payments add one extra payment per year, cutting 4–5 years off the loan.
Frequently Asked Questions
Why does so little of my payment go to principal at first?
Interest is calculated on the remaining balance. With a large balance early on, the interest charge is high, leaving little for principal reduction within a fixed payment.
Should I pay extra on my mortgage or invest?
If your rate is below 5-6%, investing often provides better returns. If above 6-7%, paying extra is a guaranteed return equal to your interest rate. Consider your tax situation and risk tolerance.
Does refinancing reset my amortization schedule?
Yes, refinancing starts a new schedule from scratch. Even at a lower rate, you restart the front-loaded interest period. This is why refinancing makes the most sense early in a loan.