What Is Amortization?

Amortization is a repayment schedule where fixed payments over time gradually pay down both interest and principal until a loan is fully repaid.

How Amortization Works

A $200,000 mortgage at 6% over 30 years:

• Fixed monthly payment: $1,199.10
• Number of payments: 360 (30 years × 12 months)
• Total paid: $431,678 (includes $231,678 in interest)

Each $1,199.10 payment includes both interest and principal. The split changes each month.

Amortization Schedule

Here's what the first three and last three payments look like:

Month 1: Payment $1,199.10 = $1,000 interest + $199.10 principal. Remaining: $199,801

Month 2: Payment $1,199.10 = $999.01 interest + $200.09 principal. Remaining: $199,601

Month 3: Payment $1,199.10 = $998.01 interest + $201.09 principal. Remaining: $199,400

Notice: Same payment, but interest decreases and principal increases as remaining balance drops.

Month 358: Payment $1,199.10 = $11.99 interest + $1,187.11 principal

Month 359: Payment $1,199.10 = $5.94 interest + $1,193.16 principal

Month 360: Payment $1,198.84 = $0 interest + $1,198.84 principal. Loan paid off.

Early Payoff Impact

If you pay an extra $200/month (total $1,399.10):

• Loan pays off in ~20 years instead of 30
• Total paid: ~$336,000 instead of $431,678
• Savings: $95,678

Doubling the payment speed more than halves the interest paid because you're paying less interest on the declining principal.

Negative Amortization

In rare cases (option ARMs), if your payment is less than accrued interest, the unpaid interest gets added to principal. Your balance grows even though you're making payments. This is negative amortization—avoid it.