Amortization

Definition

Amortization is the process of paying off a loan through regular payments, split between principal (the original amount borrowed) and interest. Every payment reduces your loan balance, but early on, most of your payment goes to interest rather than building equity. As time passes, more of each payment goes toward principal, which is why paying extra early can have a huge impact.

Why it matters

Understanding amortization explains why mortgages feel slow at first. On a 30-year mortgage, month one might be 85% interest and 15% principal. This is normal but frustrating. The good news is that any extra principal payment you make skips the interest that would have been charged on that amount for the entire remaining loan term, saving thousands. Refinancing also resets the amortization clock.

Quick example

On a $300,000 mortgage at 6% over 30 years, your first payment is about $1,799. Roughly $1,500 goes to interest and $300 to principal. By payment 180 (halfway through), that same $1,799 splits into about $900 interest and $900 principal. By the end, you're paying almost all principal.

The bottom line

Knowing what Amortization means helps you make better day-to-day money decisions. It makes rates, account options, and tradeoffs easier to compare.