Why is so little principal paid off at the start?

Interest is charged on the balance, and the balance is at its largest on day one. In the example, the first payment of about 1,199 contains 1,000 of interest. As the balance falls, so does the interest, and more of each identical payment goes to principal.

How much does paying extra really save?

Enter an extra monthly amount to see it. On the example loan, 200 a month extra clears it in 21 years instead of 30 and saves about 79,800 in interest, because every extra payment removes principal that would otherwise have accrued interest for decades.

Amortization Calculator (with Schedule)

Monthly payment and a year-by-year payoff schedule.

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Formula

Payment = P × i × (1 + i)ⁿ ÷ ((1 + i)ⁿ − 1), with i the monthly rate and n the number of payments

\text{pmt} = \frac{P\,i\,(1+i)^n}{(1+i)^n - 1}

Every payment is the same size, but its make-up shifts. Each month's interest is the rate applied to what is still owed; the rest of the payment reduces the balance. Early on the balance is large, so most of the payment is interest, and the split reverses as the loan ages. The schedule shows that shift a year at a time.

Worked example

$200,000 at 6% over 30 years is about $1,199 a month. In the first year roughly $11,933 of the payments is interest and only $2,456 reduces the loan; over the full term the interest comes to about $231,676 — more than the amount borrowed.

Where this can give the wrong answer

An extra monthly amount goes entirely to principal, so it shortens the loan and cuts interest. Check that your lender applies overpayments to principal and charges no prepayment penalty.
Some lenders round each payment up to the next cent, so a real statement can differ from this figure by a cent.
Property tax, insurance and mortgage insurance are often collected with a mortgage payment but are not part of amortization, and are not included.
A variable-rate loan re-amortizes whenever the rate changes. This schedule holds the rate fixed.

FAQ

: Interest is charged on the balance, and the balance is at its largest on day one. In the example, the first payment of about 1,199 contains 1,000 of interest. As the balance falls, so does the interest, and more of each identical payment goes to principal.

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