Amortization is the process of paying off a debt through regular scheduled payments over time. For mortgages, each monthly payment covers both interest charged on the outstanding balance and a portion of the principal. Over the loan term, the outstanding balance gradually declines to zero.
How the Amortization Formula Works
The standard amortization formula is:
M = P × [r(1+r)^n] / [(1+r)^n − 1]
Where M = monthly payment, P = principal, r = monthly interest rate (annual rate ÷ 12), n = total number of payments.
This formula produces a fixed monthly payment that remains constant throughout the loan term, even though the split between interest and principal changes every month.
Why Early Payments Are Mostly Interest
Interest each month is calculated on the outstanding balance. In year 1, that balance is nearly the full loan amount — so interest consumes most of each payment. As you pay down principal, the balance falls, and each subsequent payment has a slightly smaller interest charge and a slightly larger principal component.
On a 30-year $400,000 loan at 7%, your first payment of approximately $2,661 includes about $2,333 in interest and only $328 in principal. By year 20, the same payment includes about $1,580 in interest and $1,081 in principal.
Making Extra Payments
Extra principal payments directly reduce the outstanding balance, which reduces future interest charges and shortens the loan term. On a 30-year mortgage, making one extra payment per year can shorten the term by 4–6 years and save tens of thousands of dollars in interest. The Mortgage Calculator shows your full amortization schedule so you can see exactly how extra payments affect your payoff date and total cost.