Amortization
The schedule that splits each payment into interest first and principal second until the loan hits zero.
The schedule that splits each payment into interest first and principal second until the loan hits zero.
An amortising loan charges interest on the outstanding balance, so early payments are mostly interest and later payments are mostly principal - the balance declines on a curve, not a line. The payment itself stays level under a fixed-rate schedule, which is what makes mortgages predictable to budget, and the exact split is recomputed every month: 6.5% on a $300,000 balance is about $1,625 of interest in month one, slightly less in month two because the balance shrank.
The schedule is a lever. Extra principal applied early removes every future interest charge on that dollar, which is why an extra payment in year one outperforms the same dollar in year fifteen. Some loans allow recasting - re-amortising the same balance over a new term after a lump sum - while others simply keep the original schedule. Read the prepayment clause: most US mortgages allow it freely, while some personal and auto loans attach penalties.
Worked example
On a 30-year $300,000 mortgage at 6.5%, the level payment is about $1,896: month one is roughly $1,625 interest and $271 principal. By year twenty the split has inverted, with most of the same payment retiring balance instead of renting money.
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