Understanding Mortgage Amortization: Where Does Your Money Go?
When you pay your mortgage, how much actually goes toward the principal? Learn how amortization works and how you can save thousands.
The Anatomy of a Mortgage Payment
If you've recently purchased a home, you might be surprised to see your principal balance barely dropping in the first few years, despite making substantial monthly payments. This is due to a financial concept called amortization.
# Front-Loaded Interest
In a standard 30-year fixed-rate mortgage, your payments are calculated so that you pay the exact same amount every month. However, the composition of that payment changes drastically over time.
Because your principal balance is highest at the beginning of the loan, the interest calculated on that balance is also at its highest.
In year one, a significant majority of your monthly payment goes straight to the bank as interest. By year 25, the reverse is true: most of your payment goes toward principal.
# How to Save Thousands
You can dramatically alter this math by paying extra principal early in the loan. By making one extra mortgage payment a year (or dividing that payment by 12 and adding it monthly), you effectively bypass the amortization curve on that specific amount.
Use our Mortgage Calculator to see the exact breakdown of principal vs. interest over the lifetime of a loan, and see how much the total cost varies based on interest rates!