Mortgage amortization describes the gradual process of paying off your loan through fixed monthly payments. The payment amount never changes on a fixed-rate mortgage — but where the money goes changes dramatically over time. In the early years, most of your payment is interest. By the final years, most is principal.
How Amortization Works
Your monthly payment (principal + interest) is calculated using this formula:
$$M = P \times \frac{r(1+r)^n}{(1+r)^n - 1}$$
Where:
- M = Monthly payment
- P = Loan principal
- r = Monthly interest rate (annual rate ÷ 12)
- n = Number of payments (years × 12)
Example: $400,000 loan at 7%, 30 years
- Monthly rate: 7% ÷ 12 = 0.5833%
- Number of payments: 360
- Monthly payment (P&I): $2,661
Year-by-Year Payment Breakdown
On a $400,000 mortgage at 7% over 30 years ($2,661/month):
| Year | Annual Interest Paid | Annual Principal Paid | Remaining Balance |
|---|---|---|---|
| 1 | $27,900 | $3,932 | $396,068 |
| 5 | $27,300 | $4,532 | $380,800 |
| 10 | $26,300 | $5,532 | $356,000 |
| 15 | $24,800 | $7,032 | $320,000 |
| 20 | $22,500 | $9,332 | $270,000 |
| 25 | $18,900 | $13,000 | $196,000 |
| 30 | $10,000 | $21,900 | $0 |
Total interest paid over 30 years: ~$558,000 on a $400,000 loan
30-Year vs. 15-Year Mortgage Comparison
| Feature | 30-Year at 7% | 15-Year at 6.25% |
|---|---|---|
| Loan amount | $400,000 | $400,000 |
| Monthly payment (P&I) | $2,661 | $3,430 |
| Extra monthly cost | — | +$769 |
| Total interest paid | $558,000 | $217,000 |
| Interest savings | — | $341,000 |
| Loan paid off | 30 years | 15 years |
| Equity at year 5 | ~$19,200 | ~$79,000 |
Extra Principal Payment Impact
On a $400,000 loan at 7% over 30 years:
| Extra Payment | Interest Saved | Loan Paid Off |
|---|---|---|
| $0/month extra | $0 | Month 360 |
| $100/month extra | $28,000 | ~3.5 years early |
| $200/month extra | $56,000 | ~5 years early |
| $500/month extra | $112,000 | ~10 years early |
| $1,000/month extra | $172,000 | ~15 years early |
Biweekly Payments: Simple Amortization Accelerator
| Payment Frequency | Annual Payments | Equivalent Extra Monthly Payment | Interest Saved | Payoff |
|---|---|---|---|---|
| Monthly (12 payments) | $31,932 | — | Baseline | 30 years |
| Biweekly (26 half-payments) | $34,593 | ~$222 | ~$62,000 | ~26 years |
How biweekly works: Pay $1,330.50 (half of $2,661) every two weeks. 26 payments × $1,330.50 = $34,593/year vs. 12 × $2,661 = $31,932/year. The difference ($2,661) equals one extra full payment applied to principal each year.
Amortization for Different Loan Amounts
Monthly P&I payment at 7% for 30 years:
| Loan Amount | Monthly Payment | Total Interest (30 yrs) |
|---|---|---|
| $200,000 | $1,330 | $279,000 |
| $300,000 | $1,996 | $418,000 |
| $400,000 | $2,661 | $558,000 |
| $500,000 | $3,327 | $697,000 |
| $600,000 | $3,992 | $837,000 |
When You Should Make Extra Payments
Consider extra principal payments if:
- Your mortgage rate exceeds your expected investment return
- You don’t have higher-rate debt (credit cards, personal loans) to pay first
- You’re within 5–10 years of retirement and want to eliminate housing costs
- You value the psychological security of debt-free homeownership
Consider investing over extra payments if:
- Your mortgage rate is below 5% and you expect stock market returns of 7%+
- You can invest in tax-advantaged accounts (401k, Roth IRA) with matching or tax benefits
- You’re early in your career with decades of compound growth ahead
Amortization is why extra principal payments in the early years save the most interest — see mortgage points explained for another upfront strategy that lowers your rate and total interest cost. For the monthly payment at your specific loan amount, use the mortgage payment calculator. The dollar impact of a single percentage point in rate is larger than most borrowers expect — see true cost of a mortgage rate difference for a worked example.
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