A fixed-rate mortgage payment stays the same every month, yet the part of it that goes to interest gets smaller over time and the part that repays the loan gets larger. That process is called amortization. Once you understand it, a lot of mortgage decisions become easier to reason about: why the balance barely moves in the first few years, why extra payments made early are so effective, and what a refinance really resets.
In this article you will learn:
- the standard amortization formula and what each input means
- how to calculate the first month's interest and principal by hand
- a full worked example for a $320,000 loan at 6.5% over 30 years
- how extra monthly payments and one-off lump sums change the schedule
- common mistakes people make when reading an amortization table
What amortization means
To amortize a loan is to repay it through a series of regular payments that cover both the interest charged for each period and a slice of the original amount borrowed (the principal). With a standard US fixed-rate mortgage, the lender calculates one level payment that, if made every month for the full term, brings the balance to exactly zero at the end.
Each month the lender does two things:
- It charges interest on the balance you still owe, using the monthly rate (the annual rate divided by 12).
- It subtracts that interest from your payment. Whatever is left reduces the principal.
Because the balance is highest at the start, the interest charge is highest at the start. As the balance falls, so does the interest charge, which means more of the same fixed payment goes toward principal. The result is a schedule that is interest-heavy early and principal-heavy late.
Note that this article covers principal and interest only. Your actual monthly housing payment may also include property taxes, homeowners insurance and, in some cases, mortgage insurance, which are often collected through an escrow account and can change from year to year.
The amortization formula
The level monthly payment for a fully amortizing loan is:
M = P × r / (1 − (1 + r)^−n)
Where:
- M is the monthly principal and interest payment
- P is the principal (the amount borrowed)
- r is the monthly interest rate, which is the annual rate divided by 12, expressed as a decimal
- n is the total number of monthly payments (years × 12)
An equivalent form you will often see is M = P × r(1 + r)^n / ((1 + r)^n − 1). Both give the same answer.
Once you know M, every row of the schedule follows from two lines of arithmetic:
- Interest for the month = current balance × r
- Principal for the month = M − interest for the month
- New balance = current balance − principal for the month
Lenders round each month's interest to the cent, and the final payment is usually adjusted by a few cents so the balance lands exactly on zero.
Worked example: $320,000 at 6.5% for 30 years
This is an illustrative example. Your own loan terms, rounding conventions and payment dates may produce slightly different figures.
Inputs
- P = $320,000
- Annual rate = 6.5%, so r = 0.065 / 12 = 0.00541667 (rounded for display)
- n = 30 × 12 = 360 payments
Step 1: the monthly payment
Plugging those values into the formula gives M = $2,022.6177, which rounds to $2,022.62 per month for principal and interest.
Step 2: the first month
- Interest = $320,000 × 0.065 / 12 = $1,733.33 (the exact value is $1,733.333...)
- Principal = $2,022.62 − $1,733.33 = $289.29
- New balance = $320,000 − $289.29 = $319,710.71
In the first month, roughly 86% of the payment goes to interest and about 14% reduces the loan.
Step 3: the second and third months
| Month | Payment | Interest | Principal | Balance after payment |
|---|---|---|---|---|
| 1 | $2,022.62 | $1,733.33 | $289.29 | $319,710.71 |
| 2 | $2,022.62 | $1,731.77 | $290.85 | $319,419.86 |
| 3 | $2,022.62 | $1,730.19 | $292.43 | $319,127.43 |
Notice how the interest drops by a dollar or two each month and the principal grows by the same amount. The change is small at first, but it compounds.
Step 4: the balance over time
Running the same calculation for every month produces this picture (balances after the payment in the month shown):
| After month | Interest that month | Principal that month | Remaining balance |
|---|---|---|---|
| 12 (year 1) | $1,715.62 | $307.00 | $316,423.24 |
| 60 (year 5) | $1,624.74 | $397.88 | $299,554.97 |
| 120 (year 10) | $1,472.43 | $550.19 | $271,283.24 |
| 180 (year 15) | $1,261.81 | $760.81 | $232,188.56 |
| 240 (year 20) | $970.56 | $1,052.06 | $178,127.79 |
Two things stand out:
- After five years of payments (60 × $2,022.62 = $121,357.20 paid), the balance has fallen by only about $20,445.
- Halfway through the term, at year 15, you still owe about 73% of the original loan. The balance falls much faster in the second half.
Step 5: total interest
Over the full 360 payments, total interest on this schedule comes to about $408,141, so the total of all payments is about $728,141 on a $320,000 loan. The precise figure depends on how the final payment is rounded.
Free toolUS Mortgage Payment CalculatorEstimate your monthly PITI payment, amortization schedule, payoff date and savings from extra payments.Why the early years are interest-heavy
It can feel as if the lender is front-loading its profit, but nothing unusual is happening. The interest charge in any month is simply the rate applied to what you owe that month. You owe the most at the start, so you pay the most interest at the start. The payment is fixed, so the leftover principal portion is small early and large later.
This also explains why the crossover point, where principal first exceeds interest in a monthly payment, arrives fairly late on a 30-year loan at this rate. In the example above, the principal portion is still smaller than the interest portion at year 15 ($760.81 against $1,261.81) and only overtakes it in month 233, a little over 19 years into the loan.
How extra payments change the schedule
Any amount you pay above the scheduled payment (provided your servicer applies it to principal) reduces the balance immediately. A lower balance means less interest next month, which means more of your regular payment goes to principal, and so on. The loan does not get cheaper per month; it gets shorter.
Here is what happens to the same $320,000 loan when you add a fixed extra amount every month from the first payment. These are illustrative calculations using the same rounding as above.
| Scenario | Months to pay off | Approximate payoff time | Interest saved vs no extra |
|---|---|---|---|
| No extra payment | 360 | 30 years | $0 |
| Extra $200 per month | 281 | 23 years 5 months | $105,427.85 |
| Extra $500 per month | 216 | 18 years | $185,551.21 |
A one-off lump sum also works. In our example, a single extra $10,000 paid alongside payment number 60 (the end of year 5) shortens the loan to 337 months and saves about $37,546 in interest over the life of the loan.
Why does a one-time $10,000 save more than three times its size? Because that $10,000 would otherwise have been charged 6.5% interest, compounding through the remaining 25 years of the schedule. Removing it early removes all of the interest it would have generated.
Free toolExtra Mortgage Payment CalculatorSee how extra monthly, yearly or one-time principal payments shorten your US mortgage and cut interest.Timing matters
The earlier an extra payment is made, the more interest it avoids, because it removes principal that would otherwise have accrued interest for more months. The same $10,000 paid in year 20 would still reduce the total interest, but by much less than when paid in year 5.
What extra payments do not do
- They usually do not lower your required monthly payment on a standard fixed-rate loan. Some lenders offer a recast (re-amortizing the lower balance over the remaining term for a fee), which does lower the payment. Check with your servicer.
- They do not pause your obligation. Paying extra this month normally does not let you skip next month.
- They are not always the best use of spare cash. Paying down a 6.5% mortgage avoids interest at 6.5% on that money, a predictable saving, but you may have higher-interest debt, a thin emergency fund, or retirement contributions with an employer match to consider first.
Checklist before making extra payments
- Confirm your loan has no prepayment penalty (check your note or closing disclosure).
- Ask your servicer how to mark extra funds as "principal only" so they are not held as a future payment.
- Keep an emergency fund you can reach quickly; money paid into a mortgage is hard to get back out.
- Compare the mortgage rate with any other debts you carry and pay the most expensive first.
- Check your statements for the next few months to confirm the extra amount reduced principal.
- Re-run the numbers once a year, or after any rate change, refinance or large lump sum.
Common mistakes when reading an amortization table
Confusing principal and interest with the total payment. The table shows principal and interest. Taxes, insurance and escrow adjustments come on top and can change.
Assuming equal principal each month. Principal repaid grows every month. Dividing the loan by 360 gives a very misleading picture of your balance.
Forgetting about refinancing resets. When you refinance into a new 30-year loan, you start again at the interest-heavy end of a fresh schedule. A lower rate can still save money, but compare total interest over the time you expect to keep the loan, not just the monthly payment. Our mortgage refinance calculator helps with that comparison.
Using the annual rate instead of the monthly rate. A common spreadsheet error is to multiply the balance by 6.5% instead of 6.5% / 12. That overstates the monthly interest twelvefold.
Ignoring rounding. Your servicer's figures may differ from a calculator by a few cents per month because of rounding and payment dates. That is normal.
How to build your own schedule in a spreadsheet
If you want to see every row, a spreadsheet takes a few minutes:
- Put the loan amount, annual rate and term in three cells.
- Calculate the payment with the PMT function (in most spreadsheet software,
=PMT(rate/12, years*12, -loan)). - Create columns for month, starting balance, interest, principal, extra payment and ending balance.
- Interest = starting balance × rate / 12, rounded to two decimals.
- Principal = payment − interest + any extra payment.
- Ending balance = starting balance − principal. The next row's starting balance is this row's ending balance.
- Fill down until the balance reaches zero, and cap the last payment so the balance does not go negative.
Or use the mortgage payment calculator to get the payment and schedule in one place, and the extra mortgage payment calculator to compare scenarios side by side.
Summary
- Amortization spreads a loan into level payments that cover each month's interest plus a growing slice of principal.
- The payment formula is M = P × r / (1 − (1 + r)^−n), using the monthly rate and the number of monthly payments.
- For $320,000 at 6.5% over 30 years, the principal and interest payment is $2,022.62. The first month splits into $1,733.33 of interest and $289.29 of principal.
- The balance falls slowly at first: after 15 years about $232,189 remains in this example.
- Extra payments shorten the loan and reduce total interest, and the earlier they are made, the larger the effect. In the example, an extra $200 per month cuts the term to about 23 years 5 months and saves about $105,000 in interest.
This article is general information, not financial advice. Loan terms, rounding and servicer practices vary, so check your own loan documents or speak with a licensed professional before making decisions. See our financial disclaimer for more.