How Does Mortgage Amortization Work?

Mortgage amortization is the process of repaying a loan through fixed monthly payments that gradually shift from interest-heavy to principal-heavy over the loan term. Amortization analysis is an important component of real estate investment analysis because it reveals how equity builds through mortgage paydown — one of the four pillars of real estate investment return. The standard amortization formula derives from the time value of money — each payment covers that month’s accrued interest first, with the remainder reducing principal. This schedule is calculated using the PMT function, which solves for the fixed payment that fully retires the debt over a specified number of periods at a given rate (Vertex42 amortization derivation, CFPB mortgage reference).

The Crossover Point

At current rates, the early years are overwhelmingly interest. On a $280,000 loan at 7%, month 1 allocates approximately $1,633 to interest and only $230 to principal. The crossover point — where principal exceeds interest in each payment — occurs around year 19-20. Before that crossover, you’ve paid the majority of the loan’s total interest. This front-loading is why selling or refinancing in the first 5-10 years is particularly costly from an equity-building perspective.

The Extra Payment Multiplier Effect

Extra payments bypass the amortization schedule entirely — every dollar goes directly to principal reduction. This creates a compounding savings effect: the reduced balance means less interest accrues in every subsequent month, which means more of each future regular payment goes to principal. On a $240,000 loan at 6.5%, adding $200/month saves over $115,000 in total interest and eliminates approximately 5.5 years of payments (HughCalc algorithm reference). The earlier you start extra payments, the greater the multiplier effect.

Refinancing Restarts the Clock

Refinancing creates a new amortization schedule from scratch. Even at a lower rate, you restart the interest-heavy early phase. An investor 8 years into a 30-year mortgage has already paid most of the interest — refinancing to a new 30-year term may actually increase total interest paid despite a lower rate. Always compare using our mortgage payment calculator to see the full PITI impact of refinancing scenarios. For investment properties, understanding amortization is critical to evaluating long-term equity buildup and DSCR qualification.

How to Use This Calculator

1. Loan Amount — Enter the total borrowed amount (purchase price minus down payment). If refinancing, enter your current loan balance.
2. Interest Rate — Enter the annual interest rate from your loan offer or current mortgage statement. Even small rate differences (0.25%) compound significantly over 30 years.
3. Loan Term — Select 15 or 30 years. The calculator generates a complete month-by-month schedule for the full term. Try both to compare total interest paid.
4. Extra Monthly Payment — Enter any additional principal payment you plan to make regularly. Start with $100-$200 to see the impact, then adjust upward.
5. Start Year / Start Month — Set when your loan begins (or current month if analyzing an existing mortgage). This labels each row with calendar dates.

The calculator generates a complete month-by-month amortization table showing beginning balance, interest portion, principal portion, extra payments, and ending balance for every payment. The summary cards above the table show total monthly payment, total interest, and total amount paid over the loan life.