How Loan Amortization Works: The Truth About Where Your Money Goes
Your first mortgage payment might be 90% interest. Here's why loans are front-loaded with interest and how to beat the system.
🎯 Key Amortization Facts
- First Payment: 85-90% goes to interest
- Halfway Through: Still paying 60% interest
- Last Payment: 99% goes to principal
- Extra Payments: Can save $50K-$150K in interest
What is Loan Amortization?
Amortization is the process of paying off a loan through regular, equal payments over time. Each payment covers both interest and principal, but the split changes dramatically over the loan's life.
📊 Real Example: $300,000 Mortgage at 7% (30-Year)
Monthly payment: $1,995
Payment #1 (Month 1)
Interest: $1,750 (88%)
Principal: $245 (12%)
Remaining balance: $299,755
Payment #180 (Year 15 - Halfway!)
Interest: $1,192 (60%)
Principal: $803 (40%)
Remaining balance: $204,576
Payment #360 (Final Payment)
Interest: $12 (1%)
Principal: $1,983 (99%)
Remaining balance: $0 🎉
Why Early Payments Are Mostly Interest
This isn't a scam—it's simple math. Interest is calculated on the outstanding balance, which is highest at the beginning.
🔢 The Math Behind It
Loan amount: $300,000
Annual rate: 7%
Monthly rate: 7% ÷ 12 = 0.5833%
Month 1 Interest Calculation:
Outstanding balance: $300,000
Monthly interest: $300,000 × 0.5833% = $1,750
Total payment: $1,995
Principal paid: $1,995 - $1,750 = $245
Month 2 Interest Calculation:
Outstanding balance: $299,755 (slightly lower!)
Monthly interest: $299,755 × 0.5833% = $1,748
Total payment: $1,995
Principal paid: $1,995 - $1,748 = $247
Each month, slightly more goes to principal!
Amortization Schedule Visualization
📈 30-Year Amortization Breakdown
| Year | Payment | Interest | Principal | Balance |
|---|---|---|---|---|
| 1 | $23,940 | $20,919 | $3,021 | $296,979 |
| 5 | $23,940 | $20,238 | $3,702 | $284,851 |
| 10 | $23,940 | $18,742 | $5,198 | $263,874 |
| 15 | $23,940 | $14,497 | $9,443 | $204,576 |
| 20 | $23,940 | $9,127 | $14,813 | $128,891 |
| 25 | $23,940 | $3,436 | $20,504 | $48,611 |
| 30 | $23,940 | $139 | $23,801 | $0 |
*Total interest paid over 30 years: $418,200 on a $300K loan!
The Power of Extra Payments
Because early payments are mostly interest, extra principal payments early in the loan have massive impact.
💰 Extra Payment Strategy: $300K Loan at 7%
Regular Payments Only
Monthly payment: $1,995
Payoff time: 30 years
Total interest: $418,200
Total paid: $718,200
+$200 Extra/Month
Monthly payment: $2,195
Payoff time: 22.5 years
Total interest: $284,639
Total paid: $584,639
Save $133,561! 🎉
Extra Payment Impact Summary:
- • $200/month extra = 7.5 years earlier payoff
- • Total extra payments: $200 × 270 months = $54,000
- • Interest saved: $133,561
- • Return on investment: 247%
Where to Apply Extra Payments for Maximum Impact
✅ Best: Early in Loan Term
Extra $1,000 in Year 1 saves $10,000+ in interest. Extra $1,000 in Year 25 saves $500.
✅ Always Specify "Principal Only"
Tell lender to apply extra payment to principal, not advance due date.
✅ Even Small Amounts Help
$50/month extra on $300K loan = $26,000 saved + 3 years earlier payoff
Bi-Weekly Payment Strategy
Paying half your mortgage every two weeks instead of monthly results in 13 full payments per year instead of 12.
📅 Bi-Weekly Payment Magic
Monthly Payments (12/year)
Payment: $1,995/month
Annual total: $1,995 × 12 = $23,940
Bi-Weekly Payments (26/year)
Payment: $997.50 every 2 weeks
Annual total: $997.50 × 26 = $25,935
Extra $1,995/year toward principal!
Bi-Weekly Results on $300K at 7%:
- • Payoff time: 25.5 years (vs 30 years)
- • Interest saved: $62,000
- • Cost: $0 - it's just timing!
15-Year vs 30-Year Amortization Comparison
⏱️ Loan Term Impact: $300K at 7%
| Term | Monthly Payment | Total Interest | Total Paid |
|---|---|---|---|
| 30-year | $1,995 | $418,200 | $718,200 |
| 15-year | $2,696 | $185,280 | $485,280 |
| Difference | +$701/mo | Save $232,920! |
Common Amortization Mistakes
❌ Not Checking Where Extra Payments Go
Some lenders apply to future payments, not principal. Always specify "principal only"!
❌ Paying Extra Too Late
Extra payments in Year 25 have minimal impact. Front-load if possible.
❌ Ignoring Interest Rate on Other Debts
If you have 20% credit card debt, pay that before extra mortgage payments at 7%!
🏠 See Your Amortization Schedule
Calculate your loan amortization schedule and see exactly how much interest you'll pay—and how much you can save with extra payments.