How amortization actually works

An amortizing loan has a fixed payment that never changes, but what that payment buys changes every month. Each month the lender charges interest on the balance you still owe. Whatever is left of your payment after that interest goes to reducing the balance.

Because the balance is largest at the start, the interest charge is largest at the start too. On a 30-year mortgage at 6.5%, roughly four out of every five dollars you pay in the first year are interest.

As the balance falls, each month’s interest charge shrinks, so more of the same payment goes to principal. That is why the balance falls slowly for years and then quickly near the end.

Extra payments go straight to principal. Because they reduce the balance that every future month’s interest is charged on, an extra payment early in the loan saves far more interest than the same payment late in the loan.