Definition
Amortization
Amortization is the process of repaying a loan through regular, equal payments that each cover the interest due for the period and reduce the principal by the remainder. Early payments are mostly interest; later payments are mostly principal. An amortization schedule shows that split for every payment until the balance reaches zero.
Each month, interest is calculated on the remaining balance at the periodic rate (the annual rate divided by twelve). The payment is fixed, so whatever is left after interest goes to principal. As the balance falls, interest shrinks and the principal portion grows.
Worked example. A $200,000 loan at an illustrative 6% over 30 years has a payment of about $1,199. In month one, interest is $200,000 × 0.5% = $1,000, so only about $199 reduces the balance. Around year 20, the balance has fallen far enough that most of each payment goes to principal. Over the full term, total interest is roughly $231,700, more than the original loan.
Shorter terms amortize faster. The same loan over 15 years costs about $1,688 a month, but total interest drops to roughly $103,800. Extra principal payments shorten amortization without changing the scheduled payment, and a recast re-amortizes the remaining balance to lower it.
Not every loan amortizes fully. Interest-only loans delay principal reduction, balloon loans amortize over a longer period than the term, and negative amortization adds unpaid interest to the balance. The loan payment composition calculator shows the interest-to-principal split for any payment.
Calculators that use this term
FAQ · 2 questions
Questions about Amortization
Why is most of my early mortgage payment interest?
Interest is charged on the outstanding balance, which is largest at the start. As the balance falls, the interest portion shrinks and more of each fixed payment goes to principal.
Does paying extra change my amortization schedule?
Extra principal lowers the balance faster, so less interest accrues and the loan is paid off sooner. The required payment stays the same unless you recast or refinance.
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