Mortgage Amortization Explained: Why Your Early Payments Are Mostly Interest
In year one, 70% of your mortgage payment goes to interest. By year 25, 70% goes to principal. Here is why.
A $300,000 mortgage at 6.5% for 30 years has a $1,896 monthly payment. Month 1: $1,625 goes to interest and $271 to principal. You paid $1,896 but only reduced your loan by $271. Month 360 (the last payment): $10 goes to interest and $1,886 to principal. The payment never changes but the interest-to-principal ratio inverts over time. This is amortization.
Why This Matters
In the first 5 years, you pay approximately $93,000 in mortgage payments but only reduce the principal by $18,000. The remaining $75,000 went to interest. This is why selling a home within 5 years of buying often loses money — closing costs to sell (5-6% = $15,000-18,000) combined with minimal equity building means you may owe more than you net from the sale.
How Extra Payments Help
Every extra dollar goes directly to principal, skipping ahead in the amortization schedule. An extra $200/month on a $300,000 mortgage at 6.5% saves $92,000 in interest and cuts the loan by 7 years. Early in the mortgage, extra payments have the greatest impact because they prevent decades of compounding interest on that portion of principal.