Amortization is how a fixed mortgage payment is split between interest and principal over time. Each month, interest is charged on the remaining balance, and whatever is left of the payment reduces the loan. At the start the balance is largest, so most of the payment is interest; as the balance falls, more goes to principal. On a 30-year loan at today's rates, principal does not overtake interest until about year 21. A shorter term or extra payments move that point much earlier.
How the split is calculated
Every month the lender does the same two steps:
- Interest = remaining balance × annual rate ÷ 12.
- Principal = your payment − interest. That amount reduces the balance.
The payment itself is fixed so that the balance reaches exactly zero on the last month. Because interest is always charged on what you still owe, the split shifts a little every month — slowly at first, quickly at the end.
A 30-year schedule at 2026 rates
A $300,000 loan at 7.32% — the Freddie Mac average for a 30-year fixed mortgage on October 22, 2026 — has a payment of about $2,061 a month, before taxes and insurance.
| Month | Interest | Principal | Balance after |
|---|---|---|---|
| 1 | $1,830 | $231 | $299,769 |
| 60 (year 5) | $1,730 | $330 | $283,339 |
| 120 (year 10) | $1,585 | $476 | $259,342 |
| 180 (year 15) | $1,375 | $685 | $224,778 |
| 240 (year 20) | $1,073 | $987 | $174,993 |
| 300 (year 25) | $639 | $1,422 | $103,285 |
| 360 (year 30) | $12 | $2,048 | $0 |
After five years of payments — about $123,600 — the balance has fallen by only $16,661. Principal overtakes interest in month 248, past the 20-year mark. Over the full term you pay about $441,900 in interest, more than the amount you borrowed.
In the early years, a mortgage payment is mostly rent paid to the bank.
30 years vs. 15 years
The same $300,000 on a 15-year loan at 6.68% (Freddie Mac, October 22, 2026):
| 30 years at 7.32% | 15 years at 6.68% | |
|---|---|---|
| Monthly payment | $2,061 | $2,643 |
| Principal in month 1 | $231 | $973 |
| Principal overtakes interest | Month 248 | Month 57 |
| Total interest | $441,900 | $175,800 |
The 15-year loan costs about $580 more a month and saves about $266,000 in interest. The 30-year loan keeps the payment lower and the cash flexible. Neither is right for everyone: the question is whether the higher payment leaves enough liquidity for the rest of your life.
What extra payments do
Any amount you pay above the scheduled payment goes straight to principal. That lowers the balance, so every future month carries less interest — the effect compounds. On the $300,000 loan at 7.32%, an extra $500 a month pays it off in about 17 years and saves about $214,000 in interest. Early extra payments matter most, because they remove balance that would otherwise accrue interest for decades. Check that your lender applies the extra amount to principal and has no prepayment penalty.
Equity is not only principal
Your equity is the home's value minus the loan balance. Principal paid builds it slowly in the first years; price changes can move it much faster, in either direction. That is why equity in the first five years depends far more on the housing market than on your payments — and why selling soon after buying, with selling costs, can return less than you put in.
Common mistakes
- Reading the payment, not the schedule. The same payment builds very different equity in year 2 and year 22.
- Counting the whole payment as "savings". Only the principal part is.
- Ignoring escrow. Taxes and insurance are often paid with the mortgage but do not reduce the loan.
- Refinancing into a new 30-year term every few years. Each time, the schedule starts again with mostly interest.
- Assuming extra payments are always best. Compare the mortgage rate with your other options first — see our guide to paying off debt vs. investing.
How to do it in AOS
When to look again
Look at the schedule when you take the loan, once a year, and before any decision about the loan: extra payments, refinancing, selling the home. The schedule turns an abstract rate into a concrete number of dollars — the clearest way to see what the loan really costs.
FAQ
Why is so much of my payment interest?
Because interest is charged on the remaining balance, which is largest at the start. As the balance falls, the interest share falls too.
Does paying biweekly help?
Paying half the monthly amount every two weeks adds up to one extra monthly payment a year, which shortens the loan. The effect comes from the extra payment, not from the schedule itself — and some lenders charge fees for biweekly plans.
Do extra payments lower my monthly payment?
Usually not. On most fixed loans they shorten the term instead. Some lenders offer a recast that recalculates a lower payment after a large prepayment, often for a fee.
Is a 15-year mortgage always better?
It costs far less in interest, but the higher payment reduces your flexibility. If it would leave you without an emergency fund, a 30-year loan with voluntary extra payments can be the safer choice.
Where can I see my own schedule?
Your lender can provide it, and many loan statements show principal and interest paid to date. You can also rebuild it from your balance, rate and payment.
Sources
This article is for information only and is not investment, tax or legal advice. Figures are given with their source and date.
