How loan amortization works
Amortization is the schedule that splits each loan payment between interest and principal. The payment stays the same every month, but the split changes over time.
A real example
Take a $300,000 loan at 6.5 percent over 30 years. The monthly payment is about $1,896. In the first month, about $1,625 of that goes to interest and only about $271 reduces what you owe. Over the whole loan you would pay about $382,633 in interest, more than the amount you borrowed.
Why the split changes
Interest is charged on the balance you still owe. Early on the balance is large, so interest takes most of the payment. As the balance falls, interest shrinks and more of each payment goes to principal. That is why the balance seems to move slowly at first and then faster.
What this means for extra payments
Extra money applied to principal early in the loan has the longest time to save interest. Paying the same extra amount near the end saves much less. See the effect with the payoff calculator, or read our guide to biweekly payments.