Amortization is the process of spreading out a loan into a series of fixed payments. While your monthly payment remains the same, the way that money is applied to your loan changes every month.
How It Works
Every time you make a mortgage or personal loan payment, the money is split into two parts:
- Interest: The cost of borrowing the money.
- Principal: The actual balance of the loan.
In the beginning of your loan term, a large majority of your payment goes toward interest. As you pay down the principal balance, the amount of interest charged each month decreases, and more of your payment goes toward the principal.
The Amortization Schedule
An amortization schedule is a table that shows each periodic payment on an amortizing loan. Each payment is broken down into the amount that goes toward interest and the amount that goes toward the principal.
Why It Matters
Understanding your amortization schedule can help you decide if it’s worth making extra payments. Even a small extra payment toward the principal in the early years of a 30-year mortgage can save you thousands of dollars in interest over the life of the loan.
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If you want to see how amortization affects your specific situation, try our Mortgage Calculator or Loan Calculator.