An amortizing loan is one you pay off through equal instalments that cover both interest and principal. The instalment stays flat. The proportions inside it do not.
Interest is charged on what you still owe. Early on you owe nearly the whole balance, so almost all of your payment is interest. As the balance falls, the interest portion falls with it and more of each payment goes to principal. The effect compounds, slowly at first and then quickly.
Where P is the loan amount, r the monthly rate (annual rate ÷ 12) and n the number of payments. On a $350,000 loan at 6.5% over 30 years, that gives $2,212.24 a month.
Where the money actually goes
| Period | Interest paid | Principal paid | % to principal | Balance at year end |
|---|---|---|---|---|
| Year 1 | $22,635 | $3,912 | 15% | $346,088 |
| Year 5 | $21,477 | $5,070 | 19% | $327,638 |
| Year 10 | $19,536 | $7,011 | 26% | $296,716 |
| Year 15 | $16,852 | $9,695 | 37% | $253,957 |
| Year 20 | $13,141 | $13,406 | 51% | $194,828 |
| Year 25 | $8,008 | $18,538 | 70% | $113,065 |
| Year 30 | $912 | $25,635 | 97% | $0 |
Read the last column. After ten years of payments you have paid roughly $212,185 in interest and reduced the balance by only $53,284. Total interest across the full term is $446,406 — on a $350,000 loan.
The month where principal first exceeds interest is a useful marker. At 6.5% over 30 years it arrives around month 233 — roughly year 19. Before it, the bank is earning more from you each month than you are gaining in equity. Higher rates push the crossover later; shorter terms pull it much earlier.
Why extra payments work so well early
An extra payment goes entirely to principal. That reduces the balance, which reduces every future interest charge, which means more of every subsequent scheduled payment goes to principal too. You are not just paying down a debt, you are removing interest that would have compounded for decades.
| Extra per month | Interest paid | Interest saved | Term | Time saved |
|---|---|---|---|---|
| None | $446,406 | — | 30.0 yrs | — |
| $100 | $383,779 | $62,627 | 26.5 yrs | 3.5 yrs |
| $200 | $338,309 | $108,097 | 23.8 yrs | 6.2 yrs |
| $300 | $303,412 | $142,994 | 21.8 yrs | 8.2 yrs |
| $500 | $252,803 | $193,603 | 18.6 yrs | 11.4 yrs |
Note the shape: the first $100 a month saves far more than the fifth. And the same $100 applied in year one saves considerably more than in year twenty, because it has more future interest to cancel.
One extra payment a year
A common approach is paying one extra monthly payment annually — either as a lump sum or by adding a twelfth of your payment each month. On our example loan that cuts 5.8 years off the term and saves $101,799.
Paying half your mortgage every two weeks produces 26 half-payments a year, which is 13 monthly payments rather than 12. That is where the saving comes from — it is the extra payment, not the fortnightly rhythm. Some servicers charge a setup or per-transaction fee to arrange this. You can achieve exactly the same result for free by dividing your payment by 12 and adding that to each monthly payment yourself.
Before you overpay, check three things
- That extra money is applied to principal. Some servicers default to holding it as a prepayment of next month's instalment, which achieves nothing. Say "apply to principal" in writing and confirm it on the next statement.
- There is no prepayment penalty. Uncommon on modern US conforming mortgages but not extinct. It will be in your note.
- Nothing else deserves the money more. Credit card debt at 20% costs far more than mortgage interest at 6.5%. An employer retirement match is usually an immediate 50–100% return. Mortgage overpayment is a good use of spare money, rarely the best one.
Term length matters more than most people realise
| Term | Monthly payment | Total interest |
|---|---|---|
| 15 years | $3,049 | $198,798 |
| 20 years | $2,610 | $276,281 |
| 30 years | $2,212 | $446,406 |
A 15-year term costs $837 more each month but saves $247,608 in interest. Shorter terms also usually carry a slightly lower rate, which widens the gap further. The trade-off is flexibility: a 30-year mortgage you overpay voluntarily can be paused when life happens; a 15-year commitment cannot.
Run your own numbers Our calculator shows the payment breakdown and full amortization for any loan amount, rate and term.
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