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Amortization

Amortization is the process of paying off a loan with equal periodic payments that are split between interest and principal. In the early months, most of your payment goes to interest; as the balance shrinks, more goes to principal.

Updated April 2026 · 4 min read
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Definition

Amortization is the process of paying off a loan with equal periodic payments that are split between interest and principal. In the early months, most of your payment goes to interest; as the balance shrinks, more goes to principal.

What it means

An amortized loan has a fixed payment for its entire life — the total dollar amount you send the lender each month never changes. What changes is the split. On a $300,000 30-year mortgage at 6.5%, the first monthly payment of $1,896 is about $1,625 interest and only $271 principal. By the final payment 30 years later, it's flipped — $1,886 principal, $10 interest. The amortization schedule is the month-by-month table of this split. Most mortgage lenders will give you a full amortization schedule at closing, and most mortgage calculators can generate one.

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Why it matters

Understanding amortization changes two financial decisions. First, why 'extra principal' payments are so powerful: if your early payment is 86% interest, adding $100 of principal means you skip ~$380 of future interest. Second, why buying down your rate is almost always worth it: a 0.25% rate reduction on a 30-year mortgage can save $20,000+ over the life of the loan, even though it looks like only $40/mo in savings.

Example

A $250,000 30-year mortgage at 7% has a monthly payment of about $1,663. After 60 payments (5 years), you've paid $99,780 total — and still owe about $235,000. Only $15,000 of that $99,780 went to principal. After 120 payments (10 years), you still owe about $215,000.

Related free tools

Free toolMortgage CalculatorEstimate your monthly mortgage payment, total interest, and payoff schedule. Free, fast, and mobile-friendly.Open tool →Free toolLoan CalculatorWork out monthly payments and total interest on any loan. Enter amount, rate, and term — get a clear breakdown in seconds.Open tool →

Frequently asked questions

How do extra principal payments work?

Any dollar you send beyond the required payment goes entirely to principal, shrinking the balance immediately. On a mortgage, one extra payment per year turns a 30-year loan into roughly a 26-year loan.

Do all loans amortize?

Most consumer loans do — mortgages, auto, student, personal loans. Interest-only loans and balloon loans don't amortize normally; you pay only interest for a period, then owe the full principal.

Can amortization go negative?

Yes — 'negative amortization' loans, where the monthly payment doesn't even cover interest, so the balance grows. These are rare now but were common in the 2007-era subprime boom.

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