Amortization Schedule

An amortization schedule is the table that breaks every payment on a fixed loan into its interest and principal parts, month by month, for the life of the loan. The interest is the balance times the monthly rate; the principal is the payment minus the interest. Early payments are mostly interest and late payments are mostly principal, and the crossover on a 30-year mortgage arrives around year 19.

The schedule is the reason the mortgage is the cheapest structured debt in American finance and the reason extra payments compound the way they do: a dollar of principal paid early removes every future interest charge on that dollar. The table is fixed at origination for a fixed-rate loan, and the escrow, the taxes and insurance, sits outside it. The mortgage amortization entry covers the loan; the schedule is the table.

The mechanics run on one formula. The payment is fixed: principal times the monthly rate over one minus the compounding discount, and the split shifts every month because the interest is computed on the shrinking balance. A $400,000 loan at 6.5% for 30 years is a $2,528 payment; the first month's interest is $2,167 and the principal is $361.

The crossover is the schedule's shape. At year 19 on that loan, the payment splits roughly half interest and half principal; by year 29, the interest is a sliver and the principal is nearly the whole payment. The total interest over 30 years is roughly $510,000 on the $400,000 borrowed, which is the price of the amortization. The early years are the interest years, and the escrow payment sits beside them.

The extra payment is the lever the schedule prices. An extra $200 a month of principal on that loan removes roughly $112,000 of interest and finishes five and a half years early, because every early dollar stops its own future interest. Refinancing rebuilds the table at the new rate and term, and the amortization starts over, which is why the year-19 refinance is the expensive one. The schedule is fixed until the borrower changes it.

The schedule is the table behind the largest loan most Americans own, and the split is the detail most borrowers never read. The early years are the interest years, which is why the first decade of payments barely moves the balance. The extra payment and the refinance are the two levers that change the table.

I watched a colleague named Brent (yes, that Brent) refinance nine years into a 30-year loan, reset to a new 30-year term at a lower rate, and celebrate the $200 a month. The new schedule restarted the interest-heavy years: nine years of progress on the balance was erased, and the total interest over the new term exceeded the saving. The amortization table is the ledger the refinance rewrites.

The highest-leverage thing most Americans can do is read the split at their own loan's early years and price the extra payment against the schedule. Run the table with the mortgage amortization calculator, price the extra payments with the mortgage payoff calculator, and see the refinance arithmetic in the refinance calculator.