How US Mortgage Amortization Works

Summary

An amortization schedule shows how each monthly mortgage payment splits between principal and interest over the life of the loan. In a typical US 30-year fixed mortgage, early payments are heavily weighted toward interest. By the final years, nearly all of each payment goes to principal. Understanding this split helps borrowers see how quickly they build equity.

How it works

Each month, interest accrues on the outstanding balance. The fixed monthly payment covers that interest first; the remainder reduces the principal:

1. Interest this month = Outstanding balance x monthly rate
2. Principal this month = Monthly payment - interest
3. New balance = Old balance - principal paid

Because the balance decreases each month, the interest portion shrinks and the principal portion grows. On a $317,440 loan at 5.98%:

• Month 1: $1,582 interest, $317 principal (83% goes to interest)
• Month 180 (year 15): roughly equal split
• Month 360 (final): $9 interest, $1,890 principal

This front-loading of interest is why extra payments early in the loan are so valuable in the US. A single $1,000 extra payment in year 1 at 5.98% saves over $3,500 in interest over the remaining term.

US borrowers can typically make prepayments without penalty on conforming loans (Fannie Mae/Freddie Mac guidelines prohibit prepayment penalties), unlike some international markets where early repayment charges apply.

Worked example

$317,440 loan at 5.98% over 30 years:

1. Monthly payment: $317,440 x [0.004983 x (1.004983)^360] / [(1.004983)^360 - 1] = $1,898.85/month
2. Month 1: Interest = $317,440 x 0.004983 = $1,581.99. Principal = $1,898.85 - $1,581.99 = $316.86
3. Month 2: Balance = $317,123.14. Interest = $1,580.41. Principal = $318.44
4. Year 1 totals: $15,161 to interest, $7,625 to principal. Balance after year 1: $309,815
5. Year 30 totals: $606 to interest, $22,180 to principal. Balance: $0
6. Total interest over 30 years: $366,146 (115% of the original loan)

Key differences from other markets

• No prepayment penalties on conforming US loans. UK mortgages typically carry early repayment charges (1-5% of the outstanding balance) during the fixed-rate period.
• 30-year amortization is the US standard. The UK standard is 25 years, and Australian mortgages typically run 25-30 years. A longer term means lower monthly payments but significantly more total interest.