Key Takeaways
- Early payments are mostly interest: On a 30-year mortgage, 85%+ of your first year's payments go to interest—only ~15% reduces your loan balance
- The crossover point: At today's ~6.25% rates, you won't pay more principal than interest until year 19 of a 30-year loan
- Total interest reality: A $350,000 mortgage at 6.25% costs $425,814 in interest—121% of the original loan amount
- 15-year saves big: Choosing 15-year over 30-year saves $257,000+ in interest on a $350,000 loan
- Extra payments compound: Just $200/month extra saves $105,000+ and cuts 6 years off your mortgage
- Recasting option: After a lump sum payment, you can "recast" to lower your monthly payment for just $150-$500 (vs. thousands for refinancing)
Bottom Line
Your fixed monthly payment hides a shifting reality. Early in your loan, you're primarily paying interest—building equity slowly. Understanding amortization reveals why a $2,155 mortgage payment only reduces your balance by $300-400 in year one. The calculator above shows exactly where every dollar goes, helping you decide whether to make extra payments, choose a shorter term, or simply understand what you're really paying for.
What's in This Guide
- Amortization Calculator
- How Amortization Actually Works
- The Crossover Point (When Principal > Interest)
- Current Interest Rates (Jan 2026)
- Pre-Calculated Loan Scenarios
- How Extra Payments Save $100K+
- 15-Year vs 30-Year: The $257K Decision
- Amortization by Loan Type
- Recasting vs Refinancing
- Prepayment Penalty Guide
- Common Amortization Mistakes
- FAQs
- Summary
- Next Steps
Who This Guide Is For
- Homebuyers who want to understand where their mortgage payment actually goes each month
- Homeowners deciding whether extra payments are worth it (spoiler: often yes)
- Auto loan borrowers comparing 48-month vs. 72-month terms
- Student loan holders trying to understand why their balance barely moves
- Anyone choosing between 15-year and 30-year mortgages
You send the bank $2,000 every month. You expect your loan balance to drop by $2,000.
Instead, it drops by maybe $400.
Where did the other $1,600 go?
Interest. And understanding how that split works—and how it changes over time—is the key to potentially saving hundreds of thousands of dollars over your lifetime.
That's what amortization is really about. Not some abstract financial concept, but a concrete map showing where every dollar of your payment goes.
Let me show you exactly how it works.
How Amortization Actually Works (In Plain English)
What Is Amortization?
Amortization is the process of paying off a loan through fixed, regular payments over time. Each payment covers both principal (the amount you borrowed) and interest (the cost of borrowing). Your payment stays the same, but the proportion going to interest vs. principal shifts dramatically over the loan's life.
Every amortizing loan uses the same core formula to calculate your monthly payment:
M = P × [r(1+r)n] ÷ [(1+r)n - 1]
In plain English: M is your monthly payment, P is your loan amount, r is your monthly interest rate (annual rate ÷ 12), and n is your total number of payments.
But here's what makes amortization counterintuitive:
Interest is calculated on your remaining balance each month. When your balance is $350,000, you owe far more interest than when it's $50,000—even though your payment stays exactly the same.
Here's a concrete example. On a $350,000 mortgage at 6.25% for 30 years, your monthly payment is $2,155. But watch how that payment transforms over time:
| Payment # | Year | Interest Portion | Principal Portion | % to Interest |
|---|---|---|---|---|
| #1 | Year 1 | $1,823 | $332 | 84.6% |
| #60 | Year 5 | $1,713 | $442 | 79.5% |
| #120 | Year 10 | $1,549 | $606 | 72.0% |
| #180 | Year 15 | $1,315 | $840 | 61.0% |
| #240 | Year 20 | $989 | $1,166 | 45.9% |
| #360 | Year 30 | $11 | $2,144 | 0.5% |
Source: CalcLogix amortization calculations at 6.25% APR
The Year One Reality Check
In Year 1, you'll make $25,862 in payments—but only $4,073 actually reduces your loan balance. The other $21,789? Goes straight to interest.
That's why your loan balance seems to barely move in the early years.
The Crossover Point: When You Finally Pay More Principal Than Interest
The "crossover point" is the milestone everyone should know about: the moment when more of your payment starts going to principal than interest.
Here's when it happens at different rates:
| Interest Rate | Crossover Payment # | Years Into Loan | % of Loan Remaining |
|---|---|---|---|
| 5.00% | #195 | ~16.3 years | 55% |
| 6.00% | #222 | ~18.5 years | 52% |
| 6.25% (current avg) | #228 | ~19 years | 51% |
| 7.00% | #241 | ~20 years | 49% |
| 8.00% | #255 | ~21.3 years | 47% |
At today's average rate of 6.25%, you won't pay more principal than interest until roughly payment #228—nearly 19 years into a 30-year mortgage.
15-Year Loans Are Different
Because of the shorter term and higher payments, 15-year mortgages pay more principal than interest from your very first payment at typical rates. This is one reason 15-year loans save so much in total interest.
Current Interest Rates (January 2026)
Your amortization schedule depends heavily on your interest rate. Here's where rates stand today:
Mortgage Rates
| Loan Type | Current Rate | APR | Monthly Payment ($350K) |
|---|---|---|---|
| 30-Year Fixed | 6.22% | 6.35% | $2,149 |
| 15-Year Fixed | 5.54% | 5.68% | $2,868 |
| FHA 30-Year | 5.97% | 6.02% | $2,096 |
| VA 30-Year | 5.50% | 5.81% | $1,987 |
| 5/1 ARM | 5.52% | — | $1,989 |
Sources: Freddie Mac PMMS, Bankrate, December 2025
Auto Loan Rates by Credit Score
| Credit Tier | Score Range | New Car APR | Used Car APR |
|---|---|---|---|
| Super Prime | 781+ | 4.88-5.25% | 6.82-7.13% |
| Prime | 661-780 | 6.70% | 9.06-9.40% |
| Near Prime | 601-660 | 9.83% | 13.74% |
| Subprime | 501-600 | 13.18% | 18.86% |
| Deep Subprime | Below 501 | 15.81% | 21.58% |
Source: Experian State of the Automotive Finance Market Q3 2025
Personal Loan Rates
- Average rate: 12.23% (December 2025)
- Excellent credit (720+): 11.81-13.83%
- Good credit (690-719): 14.48%
- Fair credit (630-689): 18-24%
- Best available: 6.24% (LightStream, excellent credit)
Pre-Calculated Loan Scenarios (Reference Tables)
Use these tables to quickly benchmark your calculator results against common loan amounts.
30-Year Mortgage @ 6.25%
| Loan Amount | Monthly P&I | Total Interest | Total Paid | Interest Ratio |
|---|---|---|---|---|
| $250,000 | $1,539 | $304,153 | $554,153 | 121.7% |
| $300,000 | $1,847 | $364,984 | $664,984 | 121.7% |
| $350,000 | $2,155 | $425,814 | $775,814 | 121.7% |
| $400,000 | $2,463 | $486,645 | $886,645 | 121.7% |
| $500,000 | $3,079 | $608,306 | $1,108,306 | 121.7% |
15-Year Mortgage @ 5.50%
| Loan Amount | Monthly P&I | Total Interest | Total Paid | Interest Ratio |
|---|---|---|---|---|
| $250,000 | $2,043 | $117,713 | $367,713 | 47.1% |
| $300,000 | $2,451 | $141,255 | $441,255 | 47.1% |
| $350,000 | $2,860 | $164,798 | $514,798 | 47.1% |
| $400,000 | $3,269 | $188,340 | $588,340 | 47.1% |
| $500,000 | $4,086 | $235,426 | $735,426 | 47.1% |
Each percentage point increase adds approximately $230/month to payments and $83,000 over the loan's life. A buyer who locks in at 5% versus 8% saves nearly a quarter million dollars.
How Extra Payments Save $100,000+ in Interest
Making extra payments attacks your principal directly, reducing the balance that generates interest. The earlier you pay extra, the more you save—because that reduced principal stops generating interest for years to come.
Here's exactly what extra payments save:
Monthly Extra Payment Impact
On a $350,000 30-year mortgage at 6.25%:
| Extra/Month | New Payoff | Years Saved | Interest Saved | Return on Extra $ |
|---|---|---|---|---|
| $0 (baseline) | 30 years | — | — | — |
| $100 | 25.5 years | 4.5 years | $65,000 | $1.80 per $1 |
| $200 | 22.3 years | 7.7 years | $105,000 | $1.90 per $1 |
| $500 | 17.1 years | 12.9 years | $175,000 | $1.70 per $1 |
| $1,000 | 13.2 years | 16.8 years | $220,000 | $1.10 per $1 |
The math reveals something important: $200/month extra represents only a 9% increase in your outflow—but delivers a 25% reduction in total interest.
Alternative Prepayment Strategies
Bi-Weekly Payments
- Make 26 half-payments instead of 12 full payments
- Effectively makes 13 annual payments
- Cuts ~5-6 years off 30-year mortgage
- Requires lender setup or discipline
One Extra Payment/Year
- Pay 13th payment annually (use tax refund, bonus)
- Cuts 4-5 years off loan
- Easier to budget than monthly extra
- Best if made in January
Lump Sum in Year 1
- $10,000 in Year 1 saves $25,000-35,000
- Same $10,000 in Year 20 saves only $4,000-6,000
- Early lump sums have 3-5x more impact
- Consider inheritance, bonus, home sale proceeds
Always Specify "Apply to Principal"
When making extra payments, explicitly tell your lender to apply the amount to principal only. Otherwise, they may apply it toward your next month's payment—which doesn't save you any interest.
Most loan servicers have a dedicated "additional principal payment" option in their online portal.
15-Year vs 30-Year: The $257,000 Decision
The term length you choose has an enormous impact on total cost. Here's the real comparison using a $350,000 loan at current rates:
| Factor | 30-Year @ 6.22% | 15-Year @ 5.54% | Difference |
|---|---|---|---|
| Monthly Payment | $2,149 | $2,868 | +$719/month |
| Total Interest | $423,568 | $166,184 | $257,384 savings |
| Total Paid | $773,568 | $516,184 | $257,384 savings |
| Crossover Point | Year 19 | Payment #1 | Immediate equity |
You pay $719 more per month with a 15-year loan—but save over $257,000 in interest.
Which Term Should You Choose?
- Choose 15-year if: You can comfortably afford the ~33% higher payment, want to build equity fast, plan to stay long-term, and want a guaranteed "return" on the rate difference
- Choose 30-year if: You need payment flexibility, have other high-interest debt to pay first, want to invest the difference, or may move within 5-7 years
- Hybrid strategy: Get a 30-year loan but make payments as if it's a 15-year—gives you flexibility to reduce payments if needed while still saving interest
How Amortization Differs by Loan Type
Each loan category has distinct amortization characteristics that affect how you should use the calculator.
Auto Loans: Simple Interest, Shorter Terms
Unlike mortgages calculated monthly, most auto loans accrue interest daily on the outstanding balance. This means paying a few days early each month can actually reduce your total interest.
The Underwater Risk
Stretching from 4 to 7 years more than doubles your interest cost—and keeps you "underwater" (owing more than the car's worth) for potentially 3-4 years.
Currently 39% of financed vehicle owners owe more than their car is worth. The average new car loan is now 68.9 months ($40,927 balance).
Student Loans: Watch for Negative Amortization
Federal student loans under income-driven repayment (IDR) plans can experience negative amortization—where payments don't cover accruing interest, causing your balance to grow even while making payments.
Student Loan Facts
- Average balance: $37,797-$39,375
- Capitalized interest: Unpaid interest that becomes principal after grace periods or deferment
- Standard repayment: 10 years, fixed payments, traditional amortization
Recasting vs. Refinancing: A Hidden Option
Most people know about refinancing. But there's another option that's often better: mortgage recasting.
What Is Recasting?
Mortgage recasting (or re-amortization) is when you make a large lump-sum payment toward principal, then ask your lender to recalculate your monthly payment based on the new, lower balance—while keeping your original interest rate and remaining term.
Recasting vs. Refinancing Comparison
| Factor | Recasting | Refinancing |
|---|---|---|
| Cost | $150-$500 | $3,000-$15,000+ (2-6% of loan) |
| Credit check | No | Yes |
| Appraisal | No | Usually yes |
| Interest rate | Keeps original rate | Gets new market rate |
| Minimum required | $5,000-$10,000 (varies) | None |
| Available for | Conventional only | All loan types |
Recasting Makes Sense When...
- Your current rate is below market rates (especially if you locked in 2020-2022)
- You have a large lump sum from home sale proceeds, inheritance, bonus, or savings
- Your goal is lower monthly payments, not faster payoff
- Your credit score has declined since your original mortgage
Prepayment Penalties: What You Need to Know
Good news: prepayment penalties have largely disappeared from the mortgage market since 2014 regulations.
Mortgages
Under CFPB Qualified Mortgage rules:
- FHA, VA, USDA loans: Prepayment penalties prohibited entirely
- Conventional loans: Penalties limited to first 3 years: 2% (years 1-2), 1% (year 3), 0% (after)
- Most loans: Zero conventional mortgages originated 2018-2022 had prepayment penalties
Auto Loans
Federal law prohibits prepayment penalties on auto loans exceeding 60 months. Most use simple interest, making early payoff automatically beneficial.
7 Common Amortization Mistakes to Avoid
Mistakes That Cost You Money
- Mistake #1: Expecting fast equity in Year 1. You might pay $26,000 and only reduce principal by $4,000. This is normal—not a sign of a bad loan.
- Mistake #2: Focusing only on monthly payment. A lower payment usually means a longer term and dramatically more total interest. Always look at total cost.
- Mistake #3: Automatically choosing 30 years. If you can afford a 15-year payment, you'll save a quarter million dollars. Run both scenarios.
- Mistake #4: Making extra payments without saying "apply to principal." Your lender may apply it to next month's payment instead—saving you zero interest.
- Mistake #5: Not checking for prepayment penalties. Rare today, but verify before making large extra payments.
- Mistake #6: Refinancing when you should recast. If you locked in a low rate and have a lump sum, recasting saves thousands in closing costs while keeping your rate.
- Mistake #7: Stretching auto loans to 84 months. The lower payment doubles your interest cost and keeps you underwater for years.
Frequently Asked Questions
What is an amortization schedule?
An amortization schedule is a complete table showing every payment you'll make on your loan over its entire term. It breaks down each payment into its interest and principal components and shows your remaining balance after each payment. Most amortization calculators let you download this schedule as a PDF, Excel, or CSV file for budgeting purposes.
Why do I pay more interest at the beginning of my loan?
Interest is calculated as a percentage of your remaining balance. When your balance is highest (at the start), the interest calculation produces a larger dollar amount. As you pay down principal, less interest accrues monthly—leaving more room in your fixed payment for principal reduction.
How does refinancing restart amortization?
A refinance creates an entirely new loan with a fresh amortization schedule starting from scratch. This means you'll go back to paying mostly interest at first, just like when you started your original loan. If you refinance a 5-year-old 30-year mortgage into another 30-year mortgage, your payoff date extends by 5 years.
Should I pay extra on my mortgage or invest instead?
The decision hinges on your mortgage rate versus expected investment returns. At 7%+, paying down your mortgage offers a guaranteed return competitive with average stock market returns (~10% historically). At 4% or below, investing typically wins mathematically. Personal factors like risk tolerance also matter.
Does the amortization calculator include taxes and insurance?
Standard amortization calculators show only principal and interest (P&I). They don't include property taxes, homeowners insurance, PMI, or HOA fees. For your total monthly housing cost, use a full mortgage calculator that includes PITI (principal, interest, taxes, insurance).
Can I use an amortization calculator for car loans?
Yes! Amortization calculators work for any fixed-rate, fixed-term loan including auto loans, personal loans, and student loans. Just enter your loan amount, interest rate, and term. Note that auto loans typically use simple daily interest, so paying a few days early each month can save slightly more than the calculator shows.
What is the difference between amortization and depreciation?
In lending, amortization means paying off a loan through scheduled payments. In accounting, amortization spreads the cost of intangible assets (patents, software) over time. Depreciation serves the same purpose for tangible assets (buildings, equipment, vehicles).
What is negative amortization?
Negative amortization occurs when your payment doesn't cover the interest owed, causing unpaid interest to add to your principal—your balance grows even while making payments. This can happen with Option ARMs and student loans on income-driven repayment plans where payments are capped below the interest amount.
Amortization Calculator Summary
What is amortization?
The process of paying off a loan through equal monthly payments that cover both principal and interest over a set term. Early payments are ~85% interest; late payments are ~95% principal.
Key numbers to know:
- Crossover point (50/50 split): ~Year 19 on a 30-year loan at 6.25%
- Total interest on $350K at 6.25% for 30 years: ~$425,000 (121% of loan)
- Savings with 15-year vs 30-year: ~$257,000
- Impact of $200/month extra: Saves ~$105,000, cuts 6 years off loan
Best practices:
- Always look at total cost, not just monthly payment
- Consider 15-year loans if you can afford higher payments
- Make extra principal payments to accelerate payoff
- Specify "apply to principal only" on extra payments
- Consider recasting (not refinancing) if you have a low rate and lump sum
Next Steps
Now that you understand how amortization works and where your payments go, here's how to put this knowledge to use:
Calculate Your Amortization Schedule
Related Calculators
Helpful Resources
- How Amortization Works - Deep dive into the math and concepts behind amortization
- Mortgage Rates Guide - Understand what drives rates and how to get the best one
- Mortgage Rates Today - Check current rates to use in your calculations
- CFPB Homeownership Resources - Official consumer protection information
- Freddie Mac PMMS - Primary Mortgage Market Survey data