What amortization means on a loan
Amortization is paying off a debt with a fixed payment on a fixed schedule. Each payment covers the interest for the month first. Whatever is left cuts the balance. A lower balance means less interest next month, so more of the same payment goes to principal, and the shift speeds up toward the end.
Mortgages, car loans, and most personal loans run this way. Credit cards do not, since the minimum payment changes with the balance and no end date is set.
Month one of a $285,000 mortgage, by hand
Load sample fills in a $285,000 loan at 6.75% for 30 years, plus $150 extra a month. Here is the first payment without the extra, using a calculator on your desk.
- Monthly rate. 6.75% divided by 12 is 0.5625%, or 0.005625.
- Interest. $285,000 times 0.005625 is $1,603.13.
- Principal. The payment of $1,848.50 minus $1,603.13 leaves $245.37.
- New balance. $285,000 minus $245.37 is $284,754.63. Month two starts from this number.
Where $1,848.50 comes from
M = P × r ÷ (1 − (1 + r)−n)
M is the payment, P the loan amount, r the monthly rate, n the number of payments.
285000 × 0.005625 ÷ (1 − 1.005625−360) = 1848.50
In Excel or Google Sheets, =PMT(6.75%/12, 360, -285000) returns the same figure.
Why ten years of payments barely dents the balance
On the sample loan without extra payments, ten years of checks adds up to $221,820. Only $41,891.28 of this comes off the debt. The rest is interest.
| Payment | Interest | Principal | Share to interest | Balance after |
|---|---|---|---|---|
| 1 | $1,603.13 | $245.37 | 86.7% | $284,754.63 |
| 60 (year 5) | $1,506.87 | $341.63 | 81.5% | $267,546.14 |
| 120 (year 10) | $1,370.18 | $478.32 | 74.1% | $243,108.72 |
| 180 (year 15) | $1,178.79 | $669.71 | 63.8% | $208,893.41 |
| 240 (year 20) | $910.83 | $937.67 | 49.3% | $160,988.17 |
| 300 (year 25) | $535.66 | $1,312.84 | 29.0% | $93,915.28 |
| 360 (year 30) | $10.37 | $1,843.64 | 0.6% | $0.00 |
- Payment 128: half of all the interest on this loan is already paid.
- Payment 238: principal passes interest for the first time, almost 20 years in.
- Payment 259: the balance falls below half the original loan.
This matters most if you plan to move. Sell after seven years and your payments have cut the debt by $26,255.15, out of $155,274 paid. Agent fees and closing costs on a sale often run close to this figure. The same logic applies to refinancing into a new 30-year loan, which puts you back at payment 1, where interest takes the largest share.
Extra money does the most work early
Every dollar sent to principal stops collecting interest for the rest of the loan. The earlier it arrives, the more months it stays out of the interest charge. Here is one $10,000 payment on the sample loan at three points.
| $10,000 paid at | Interest removed | Time removed |
|---|---|---|
| Payment 12 (year 1) | $53,991.33 | 2 years 10 months |
| Payment 120 (year 10) | $26,444.22 | 1 year 7 months |
| Payment 240 (year 20) | $9,093.34 | 10 months |
Small monthly amounts add up the same way. The sample's $150 a month removes $88,166.38 of interest and ends the loan 5 years 11 months early.
Before you send extra money
- Mark the payment as principal only. Some servicers hold unmarked money and apply it to next month's payment, which saves you almost nothing. Check your next statement.
- Expect the same required payment. Extra payments shorten the loan. The monthly bill stays put unless you ask for a recast, which re-spreads the lower balance over the remaining term, usually for a fee and after a sizable lump sum.
- Look for a prepayment penalty. Federal rules limit these on most US home loans to certain fixed-rate loans and the first three years. Your Closing Disclosure states whether you have one. Car and personal loans follow their own contract and state law.
- Keep your cash cushion. Money in the house does not come back without a sale or a new loan. Fund emergency savings and clear higher-rate debt first.
Term moves the numbers more than you think
Interest follows the balance over time, so a short loan never builds the same interest-heavy start. A $32,000 car loan at 7.9% for five years pays $647.31 a month, and 32.5% of the first payment goes to interest. The 30-year sample starts at 86.7%, with a lower rate.
At the same 6.75%, a 15-year version of the sample costs $2,521.99 a month, $673.49 more, and removes $211,506.67 of interest. Lenders usually price 15-year loans lower, so a real quote widens the gap. If the higher required payment worries you, a 30-year loan with voluntary extra payments gives you a way to pull back in a bad year. You pay for the option through the higher rate.
What this calculator leaves out
The schedule fits a fixed-rate loan with monthly payments. Other setups need a different tool, or a workaround.
- Taxes, insurance, PMI, HOA dues
- The payment here is principal and interest only. Your mortgage bill runs higher. The mortgage calculator adds those costs.
- Adjustable rates
- One rate applies for the full term. For an ARM, run the fixed period, read the balance at the reset, then start a new schedule from there at the new rate. Future rates are a guess either way.
- Daily simple interest loans
- Many car and personal loans charge interest by the day. Paying early or late moves the split, so treat this schedule as an estimate.
- Canadian fixed mortgages
- These normally compound twice a year, not monthly, so the payment here runs a little high.
- Interest-only periods, balloons, and rate buydowns
- None are modeled. A loan with these features needs the lender's own schedule.
- Repeat lump sums
- You get one lump sum. For a yearly bonus payment, divide the amount by 12 and add the result to Extra each month. The estimate runs slightly high on savings, since real bonus money arrives later in the year.
Looking for amortization in accounting?
Bookkeepers use the same word for writing off an intangible asset, such as a patent or software license, over its useful life. A $60,000 license with a 5-year life expenses $12,000 a year on a straight line, with no interest involved. This page does not handle that case. The depreciation calculator runs the same straight-line math. For US tax purposes, most purchased intangibles such as goodwill follow a fixed 15-year schedule under Section 197, so confirm with your accountant.