Mortgage Amortisation Explained

An amortized mortgage divides your fixed payment into interest (lender's share) and principal (equity building). In year 1, nearly all goes to interest; by year 30, nearly all goes to principal. This asymmetry is the hidden cost of mortgages.

Key takeaways

• A fixed monthly payment is divided into interest (paid first) and principal (equity). The split changes every month.
• In year 1 of a 30-year mortgage at 6%, roughly 83% of your payment is interest; only 17% builds equity.
• By year 15, you've paid 70% of total interest but own only 30% equity. Interest is heavily front-loaded.
• Paying extra principal in year 1 is mathematically optimal—it saves years of interest on a larger loan balance.
• Understanding amortization reveals why a 15-year mortgage costs less in total interest despite higher monthly payments.

How amortization works

A mortgage is an amortized loan, meaning your fixed monthly payment covers both interest and principal reduction. The payment is calculated so that after exactly 360 payments (30 years), the loan balance reaches zero.

The formula: For a loan of P at annual rate r over n months, monthly payment M is:

M = P × [r(1 + r)^n] / [(1 + r)^n − 1]

For a $280,000 loan at 6% annual (0.5% monthly) over 360 months:

M = 280,000 × [0.005(1.005)^360] / [(1.005)^360 − 1]
M ≈ $1,679

Each month, your $1,679 payment is split:

Month 1:

• Beginning balance: $280,000
• Interest owed (6% annual = 0.5% monthly): $280,000 × 0.005 = $1,400
• Principal: $1,679 − $1,400 = $279
• Ending balance: $280,000 − $279 = $279,721

Month 2:

• Beginning balance: $279,721
• Interest: $279,721 × 0.005 = $1,399
• Principal: $1,679 − $1,399 = $280
• Ending balance: $279,721 − $280 = $279,441

Notice: As balance shrinks, interest shrinks slightly, and principal increases slightly. This continues for 360 months until the balance is zero.

The interest-heavy front end

Over a 30-year mortgage, here's how the principal/interest split evolves:

Year 1 (months 1–12):

• Average interest per payment: $1,399
• Average principal per payment: $280
• Ratio: 83% interest, 17% principal
• Total principal paid: $3,360
• Total interest paid: $16,788

Year 5 (months 49–60):

• Average interest per payment: $1,297
• Average principal per payment: $382
• Ratio: 77% interest, 23% principal
• Total principal paid: $4,584
• Total interest paid: $15,564

Year 15 (months 169–180):

• Average interest per payment: $933
• Average principal per payment: $746
• Ratio: 55% interest, 45% principal
• Total principal paid: $8,952
• Total interest paid: $11,196

Year 30 (months 349–360):

• Average interest per payment: $8
• Average principal per payment: $1,671
• Ratio: 0.5% interest, 99.5% principal
• Total principal paid: $20,052
• Total interest paid: $12

After 30 years:

• Total payments: $1,679 × 360 = $604,440
• Total interest: $324,440
• Total principal: $280,000
• Interest as % of principal: 115.9%

You pay $1.16 in interest for every $1 borrowed. This is the silent tax of time value.

Cumulative effect: The halfway point illusion

Many borrowers assume that after 15 years (halfway through), they've paid off 50% of the principal. Reality is harsher:

After 15 years of payments ($1,679 × 180 = $302,220 paid):

• Principal remaining: $163,000 (58% of original loan)
• Principal paid down: $117,000 (42% of original loan)
• Total interest paid: $185,220 (61% of total interest for the loan)

After 15 years, you've paid 61% of the total interest but only 42% of the principal. The second 15 years are genuinely cheaper—you're paying less interest because the balance is smaller—but it doesn't feel that way month-to-month.

Why paying down principal early matters

Extra principal payments compound powerfully because they reduce the balance on which future interest accrues.

Scenario: $280,000 loan at 6% over 30 years, baseline payment $1,679/month.

If you pay an extra $100/month toward principal (making it $1,779/month):

• New payoff date: 25 years instead of 30 (60 months early)
• Extra principal paid: $100 × 360 = $36,000 (not all of it—some would have been paid as principal anyway)
• Actual extra principal paid: ~$32,500
• Total interest saved: $1,679 × 360 − ($1,779 × 300) = Interest from months 301–360 avoided ≈ $42,000

That $100/month extra saves $42,000 in interest—a 42:1 return. The sooner you pay principal, the more interest you avoid.

Paying $100/month extra in year 1 saves more interest than paying $100/month extra in year 15, even though both reduce the overall balance. Early principal reduction targets the highest-interest-rate portion of the loan.

15-year vs 30-year: The total interest difference

30-year mortgage at 6%:

• Monthly P&I: $1,679
• Total paid: $604,440
• Total interest: $324,440

15-year mortgage at 5.5% (typical rate discount):

• Monthly P&I: $2,159
• Total paid: $388,620
• Total interest: $108,620

Difference:

• Monthly: $2,159 − $1,679 = $480 more per month
• 30-year total: $604,440 − $388,620 = $215,820 savings with 15-year
• Interest savings: $324,440 − $108,620 = $215,820

The 15-year saves 66% of the interest cost. However:

1. Cash flow trade-off: The $480/month higher payment is real. Not everyone can afford it.
2. Opportunity cost: If you could invest that $480 at 7% annually (in stocks or bonds), 30-year invested growth might exceed the interest savings. Over 30 years, $480/month at 7% grows to $680,000. Subtract the $215,820 interest saved from the 15-year: net opportunity gain of $464,000. But this requires actual investing discipline.

Amortization schedule uses

A full amortization schedule (available from any lender, free online) shows every payment broken down by month. Uses:

1. Tax deduction planning: You can see how much interest you paid each year, claimable on Schedule A (if you itemize).
2. Payoff planning: See exactly when you'll own 50%, 75%, or 100% equity.
3. Refinance evaluation: If refinancing, see how much new interest you'll pay vs. remaining term.
4. Extra payment strategy: Model paying extra principal to see payoff acceleration.

Worked example: The cost of a late payment strategy

Loan: $280,000 at 6% over 30 years.

Strategy A (Conservative): Pay $1,679/month, nothing extra.

• 30-year cost: $604,440
• Interest: $324,440

Strategy B (Aggressive, discipline to invest difference):

• Get a 15-year mortgage at 5.5%, pay $2,159/month.
• Total 15-year cost: $388,620
• Interest: $108,620
• Savings: $215,820

Strategy C (Hybrid, realistic most common):

• Take 30-year at 6%, pay $1,679/month normally.
• Every bonus/tax refund, put $5,000–$10,000 toward principal.
• With ~$25,000 extra principal over 15 years, you'd pay off in ~23 years instead of 30.
• Interest saved: ~$120,000 (midway between 30-year and 15-year)
• Monthly payment: $1,679 (no budget strain)
• Flexibility: Can pause extra payments in lean years.

Strategy C balances monthly affordability with interest minimization. Few people are disciplined enough for Strategy B; Strategy A leaves money on the table. Strategy C is realistic.

Amortization visualization

Next

Understanding amortization reveals why loan term matters hugely. The next article compares 30-year and 15-year mortgages directly—not just monthly payment, but total cost, opportunity cost, and when each makes sense for your situation.

Related concepts

• 30-Year vs 15-Year Mortgage
• Fixed-Rate vs Adjustable-Rate Mortgages