What amortization means
Amortization is the process of paying off a loan with regular payments that each cover the interest for the month and reduce the balance. On a fixed-rate loan the payment stays the same, but the mix changes: early payments are mostly interest, and later payments are mostly principal. The schedule above lists every payment so you can see it happen.
Example
A $300,000 loan at 6.5% for 30 years has a monthly payment of $1,896.20. In the first month, interest is $300,000 × 6.5% ÷ 12 = $1,625.00, so only $271.20 of the payment reduces the balance. Over the 360 payments you pay about $382,600 in interest, more than the amount borrowed.
What extra payments do
Money you pay on top of the regular payment goes straight to principal, which lowers the balance that future interest is charged on. Adding $200 a month to that loan pays it off in 23 years and 1 month instead of 30, and saves about $103,400 in interest. The earlier you start, the bigger the effect.
Before you send extra money
- Check for prepayment penalties. Some loans charge a fee for paying early. Most mortgages do not, but confirm.
- Tell your lender to apply it to principal. Otherwise it may be treated as an early payment on the next month's bill.
- Weigh it against other uses. Paying off a high-interest debt or building an emergency fund may be a better first step than prepaying a low-rate loan.
Our guide how loan amortization works explains the schedule in more detail. For a quick yearly view without extra payments, use the loan calculator.