Mortgages guide
How Mortgage Amortization Works
An amortization schedule separates each payment into interest and principal and tracks the remaining balance.
How a scheduled payment is divided
For a standard amortizing mortgage, the interest portion for a period is calculated from the outstanding balance and the loan’s applicable periodic rate. The scheduled payment first covers that interest; the remainder reduces principal. A different loan structure, rate reset, or payment timing can change this pattern.
A first-payment example
For a $200,000 loan at a fixed 6% nominal annual rate with monthly payments, a basic monthly model uses 0.5% interest. The first month’s interest is $1,000. With a payment of about $1,199.10, roughly $199.10 goes to principal and the balance falls to about $199,800.90, before rounding or contract-specific adjustments.
What is outside the amortization schedule
An amortization schedule models loan payments, not the full cost of owning a home. Property taxes, homeowners insurance, HOA dues, and mortgage insurance are separate. Extra payments affect the schedule only as the servicer applies them; ask how to designate principal-only payments and review loan terms.
Worked example
On a $200,000 loan at 6% APR with monthly payments over 30 years, principal and interest are about $1,199.10 per month. The first month accrues $1,000 in interest, leaving about $199.10 of the scheduled payment for principal.
Frequently asked questions
Why does principal reduction often start slowly?
Interest is calculated on the outstanding balance, which is largest early in the schedule.
Does amortization include property taxes?
No. Amortization describes scheduled loan payments; taxes and insurance are separate costs.
Sources and further reading
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