Loan balance calculation? Each mortgage payment reduces your principal by the amount that exceeds the interest due. In the early years, payments are mostly interest. Over time, the principal portion grows through a process called amortization.
How Amortization Works
Amortization is the process of paying off a loan through scheduled payments over time. Each payment is split between principal and interest. The interest portion is calculated on the remaining balance each month. As the balance decreases, less interest accrues, and more of your payment goes toward principal.
On a $300,000 loan at 6.5% over 30 years, your first payment includes about $1,625 in interest and only $271 toward principal. By year 15, roughly half of each payment goes to principal. By year 25, most of the payment pays down the balance.
Payoff Timeline
The loan balance decreases slowly at first. After 10 years of a 30-year loan, you may have paid off only about 15% of the principal. The other 85% of your payments went to interest. This is not a bad thing -- it is the normal pattern of amortization. Building equity accelerates in the second half of the loan term.
Patrick Kevin Fagan notes that extra principal payments in the early years have an outsized impact. Paying an extra $100 per month in year one saves more interest than paying $200 per month in year 15 because the early payment reduces the balance that accrues interest for the longest period.
