Amortization
Amortization is the process of paying off a loan through scheduled, equal payments that cover both principal and interest. Early payments are mostly interest; later payments are mostly principal.
A $400,000 mortgage at 6.5% over 30 years has a monthly payment of $2,528. In month 1, $2,167 is interest and only $361 is principal.
An amortising loan (mortgage, car loan, personal loan) has a fixed payment schedule calculated so that the loan reaches a zero balance at the end of the term. Each payment is the same amount, but the split between interest and principal changes every period.
In the early years of a 30-year mortgage, the vast majority of each payment covers interest on the outstanding balance. As the principal shrinks, the interest portion falls and the principal portion rises — even though the monthly payment stays constant.
Lenders present this as an amortisation schedule: a table showing each payment, the interest paid, the principal paid, and the remaining balance. You can generate a full schedule with our mortgage calculator.
Put this into practice with our free calculator:
Open calculator →Related terms
- Principal
- The principal is the original amount borrowed on a loan, or the outstanding balance still owed — excluding interest. On a mortgage, principal is the portion of each payment that reduces the loan balance.
- Interest Rate
- An interest rate is the percentage of the principal charged by a lender to a borrower for the use of money, or paid by a bank on deposited funds. It is quoted as an annual percentage.
- Mortgage Payment
- A mortgage payment is the fixed monthly amount owed to a lender, covering principal and interest (P&I). It may also include escrow for property tax and homeowners insurance (PITI).