How Mortgage Amortization Works
Why your early mortgage payments are mostly interest, how that shifts over time, and what an amortization schedule actually shows.
Look at the first payment on a 30-year mortgage and you might be surprised how little of it goes toward the loan balance. That's not a mistake or a hidden fee — it's how amortization works, and understanding it explains a lot about mortgages that otherwise seems counterintuitive.
The Core Mechanic: Interest on the Current Balance
Every month, interest is calculated on whatever balance remains — not on the original loan amount. Early in the loan, the balance is at its highest point, so the interest charge is also at its highest point. Because your monthly payment is fixed, whatever's left after covering that interest is what goes toward principal. High balance means high interest means a small principal portion, especially in the loan's first years.
Why the Split Shifts Over Time
As principal is paid down — even slowly at first — the balance shrinks, which shrinks next month's interest charge, which leaves a slightly larger share of the fixed payment for principal. This creates a feedback loop: more principal paid down leads to less interest charged, which leads to even more principal paid down the following month. The shift is slow at the start and dramatic by the end.
A Concrete Illustration
On a $320,000 loan at 6.5% over 30 years, the very first payment of roughly $2,023 includes about $1,733 in interest and only $290 in principal — interest makes up over 85% of that first payment. By the final year of the loan, that ratio has essentially flipped, with the overwhelming majority of each payment reducing principal.
Why Extra Payments Are So Effective Early On
Because so little of an early payment reduces principal, any extra amount you add goes entirely toward principal — and that extra principal stops accruing interest immediately, for every remaining month of the loan. This is why extra payments made early in a mortgage save disproportionately more interest than the same extra payment made later, when the balance and its accompanying interest charge are already much lower.
Reading Your Own Amortization Schedule
An amortization schedule lists every payment with its principal, interest, and remaining balance — exactly what the mortgage calculator generates for any loan amount, rate, and term you enter, including the effect of any extra monthly payment. The loan calculator produces the same breakdown for non-mortgage instalment loans.