How Amortization Works

When you take out a fixed-rate loan, your monthly payment stays the same for the entire term. But the split between principal and interest changes every month. In the early years, most of your payment goes to interest. By the end, almost all goes to principal.

For a $250,000 mortgage at 6.5% for 30 years, your first payment of $1,580 breaks down as: $1,354 interest + $226 principal. By year 20, the same $1,580 is split: $677 interest + $903 principal. See our mortgage calculator for a detailed breakdown.

The Power of Extra Payments

Adding even $100/month extra to a $250,000 mortgage at 6.5% saves over $55,000 in interest and pays off the loan 4+ years early. Every dollar of extra payment goes directly to principal, which reduces the balance that accrues interest.

Use our loan payoff calculator to explore different extra payment strategies.

Amortization vs. Simple Interest Loans

In an amortized loan, payments are structured so the loan is fully paid off at the end of the term. In a simple interest loan, interest is calculated only on the remaining principal balance. Most mortgages and auto loans use amortization.