What is Amortization?

Amortization is the process of spreading out a loan into a series of fixed payments over time. While your monthly payment remains the same (on a fixed-rate mortgage), the composition of that payment changes drastically from month 1 to month 360.

The Early Years: Paying the Bank

In the first few years of a 30-year mortgage, the vast majority of your payment goes toward interest.

For example, on a $300,000 loan at 5%, your first month's interest charge is $1,250. If your total payment is $1,610, only $360 goes toward the principal. You are primarily paying the bank for the privilege of borrowing the money.

The Tipping Point

As you slowly chip away at the principal, the interest calculated on that smaller balance decreases. Consequently, a larger portion of your fixed payment goes toward the principal.

Usually, halfway through the loan term, you reach a "tipping point" where more of your payment goes toward principal than interest.

How Overpayments Break the Curve

This is why overpayments are so powerful. By making an extra payment, you bypass the amortization schedule. You force the principal down immediately, which permanently alters the trajectory of the interest curve in your favor.

Legal Note

Your lender is legally required to provide you with an amortization schedule when you close on your loan. Reviewing it can provide a stark realization of how much interest you will pay if you don't overpay.