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.