What Is Loan Amortization?
Amortization is the process of spreading a loan balance across scheduled payments over time. Each payment you make on a fixed-rate loan covers two things: interest (the lender's fee for lending the money) and principal (reduction of the outstanding loan balance). The amortization schedule is the month-by-month table showing exactly how much of each payment goes to each.
The key feature — and the thing most borrowers miss — is that amortization is front-loaded with interest. In the early months of a loan, the vast majority of your payment is interest. Over time, as the principal balance decreases, each payment's interest portion shrinks and the principal portion grows.
Why Loans Are Front-Loaded With Interest
The formula is simple but the implications are profound. Each month, interest owed is:
When your balance is large (early in the loan), the interest charge is large. As your balance shrinks (late in the loan), the interest charge shrinks. Your fixed monthly payment stays constant — so as interest shrinks, the portion going to principal automatically grows. This creates the characteristic curve of amortization.
Reading an Amortization Table: A Real Example
Here's a sample amortization table for a $200,000 loan at 6.5% interest over 30 years (monthly payment: $1,264.14):
| Month | Payment | Principal | Interest | Balance Remaining |
|---|---|---|---|---|
| 1 | $1,264.14 | $181.81 | $1,083.33 | $199,818.19 |
| 2 | $1,264.14 | $182.79 | $1,082.35 | $199,635.40 |
| 12 | $1,264.14 | $193.89 | $1,070.25 | $197,490.19 |
| 60 (yr 5) | $1,264.14 | $238.80 | $1,025.34 | $237,582.40 |
| 120 (yr 10) | $1,264.14 | $306.46 | $957.68 | $176,120.35 |
| 180 (yr 15) | $1,264.14 | $393.28 | $870.86 | $160,394.27 |
| 240 (yr 20) | $1,264.14 | $504.79 | $759.35 | $139,242.56 |
| 300 (yr 25) | $1,264.14 | $647.89 | $616.25 | $113,303.27 |
| 360 (yr 30) | $1,264.14 | $1,257.38 | $6.82 | $0.00 |
Notice month 1: of your $1,264 payment, only $182 reduces the debt. The other $1,083 is pure interest. By year 20, the split finally tips — about $505 goes to principal vs. $759 to interest. You only achieve a roughly 50/50 principal/interest split around year 22–23 of a 30-year loan.
The Total Cost Revelation
On this $200,000 loan, by the time you make the final payment after 30 years:
- Total paid: $455,089 (360 × $1,264.14)
- Original principal: $200,000
- Total interest paid: $255,089 — more than the loan itself
This is the number that shocks most borrowers. You are effectively buying the same home twice over 30 years — once with principal, once with interest.
How Extra Payments Change Everything
Because early payments are so interest-heavy, even small additional principal payments can dramatically reduce your total interest cost. Here's what happens with extra payments on the same $200,000, 6.5%, 30-year loan:
| Extra Monthly Payment | Loan Paid Off | Total Interest | Interest Saved |
|---|---|---|---|
| $0 (standard) | 30 years | $255,089 | — |
| +$100/month | 25 yr 3 mo | $206,771 | $48,318 saved |
| +$200/month | 22 yr 0 mo | $174,665 | $80,424 saved |
| +$500/month | 16 yr 9 mo | $124,210 | $130,879 saved |
| +$1,000/month | 12 yr 3 mo | $85,449 | $169,640 saved |
Adding just $100/month — possible for many families by cutting a single recurring subscription or dining-out expense — saves over $48,000 and eliminates nearly 5 years of payments. The earlier you start, the higher the impact, because early extra payments eliminate the most interest-heavy months.
3 Strategies for Faster Payoff
Bi-Weekly Payment Strategy
Instead of one monthly payment, make half the monthly payment every two weeks. This results in 26 half-payments per year (= 13 full monthly payments instead of 12). The extra month's payment per year cuts a 30-year loan to roughly 26 years with zero extra budgeting effort.
Annual Lump-Sum Extra Payment
Apply tax refunds, bonuses, or windfalls directly to principal. Even a single $2,000–$5,000 extra payment in year 1 or 2 saves much more interest than the same payment made in year 15, because it eliminates many high-interest-ratio months.
Round-Up Payments
If your payment is $1,264, pay $1,300 or $1,400. This simple habit is psychologically easy, adds up over time, and requires no formal extra-payment process — just enter the higher amount when paying.