Amortization
The process of gradually paying off a loan through regular payments that cover both principal and interest, with early payments being mostly interest.
Amortization schedules reveal an important truth about loans: in the early years, the majority of each payment goes toward interest, not principal. On a 30-year mortgage, it can take 15+ years before more than half of your payment reduces the actual debt. This front-loading of interest is why extra payments early in the loan term are so powerful — they go directly to principal, reducing the base on which future interest is calculated. An amortization table shows the exact breakdown of each payment into principal and interest over the life of the loan. Understanding this helps you make informed decisions about refinancing, extra payments, and loan term selection.
Example
Month 1 of a $250,000 mortgage at 6%: payment $1,499. Interest: $1,250 (83%). Principal: $249 (17%). By month 180: Interest: $729 (49%). Principal: $770 (51%).
Related terms
Mortgage
A long-term loan secured by real property, used to finance the purchase of a home or investment property, typically repaid over 15–30 years.
Interest Rate
The percentage charged on borrowed money or earned on deposited/invested money, expressed as an annual rate.
APR (Annual Percentage Rate)
The annualized cost of borrowing expressed as a percentage, including interest and mandatory fees, used to compare loan products.
Explore more terms
LTV (Loan-to-Value Ratio)
The ratio of the loan amount to the appraised value of the property, expressed as a percentage. Lower LTV means less risk for the lender.
Refinancing
Replacing an existing loan with a new one, usually to secure a lower interest rate or better terms.
Annuity Payment (Installment)
A fixed regular payment that fully repays a loan over its term, blending interest and principal in each instalment.
Early Repayment (Overpayment)
Paying off part or all of a loan ahead of schedule to save on future interest.
Rental Yield
The annual rental income from a property expressed as a percentage of its purchase price or current market value.
Home Equity
The portion of your property you truly own, its market value minus the outstanding mortgage.