How to Calculate Amortization (Schedules & Formulas)

Amortization is the process of paying off a loan through a series of fixed payments over time. Each payment covers two things: a portion goes toward the interest the lender charges, and the rest reduces your outstanding principal balance. Understanding how this split works is the key to making smart borrowing decisions and potentially saving tens of thousands of dollars over the life of a loan.

This guide explains the amortization formula, how to read a schedule, why interest is front-loaded, and strategies for paying off your loan faster. For instant calculations, try our Free Amortization Calculator.

The Amortization Formula

The standard formula calculates the fixed monthly payment for a fully amortizing loan:

$M = P \times \frac{r(1+r)^n}{(1+r)^n - 1}$

Where:

• M = monthly payment
• P = principal (loan amount)
• r = monthly interest rate (annual rate / 12)
• n = total number of payments (years x 12)

Example: You borrow $250,000 at 6.5% annual interest for 30 years.

• P = $250,000
• r = 0.065 / 12 = 0.005417
• n = 30 x 12 = 360

Calculation:

• (1 + 0.005417)^360 = 6.9913
• Numerator: 0.005417 x 6.9913 = 0.037876
• Denominator: 6.9913 - 1 = 5.9913
• M = $250,000 x (0.037876 / 5.9913) = $1,580.17 per month

Over 360 payments, you will pay a total of $1,580.17 x 360 = $568,861. That means $318,861 goes to interest on top of the $250,000 principal. This is why understanding amortization matters.

How to Read an Amortization Schedule

An amortization schedule is a table that shows every payment over the life of the loan. Each row breaks down the payment into principal, interest, and remaining balance.

Here are the first 6 months for the $250,000 loan above:

Payment #	Payment	Principal	Interest	Remaining Balance
1	$1,580.17	$225.84	$1,354.33	$249,774.16
2	$1,580.17	$227.06	$1,353.11	$249,547.10
3	$1,580.17	$228.29	$1,351.88	$249,318.81
4	$1,580.17	$229.53	$1,350.64	$249,089.28
5	$1,580.17	$230.77	$1,349.40	$248,858.51
6	$1,580.17	$232.02	$1,348.15	$248,626.49

Key observations:

• The total payment ($1,580.17) stays the same every month.
• In month 1, only $225.84 (14.3%) goes to principal. The other $1,354.33 (85.7%) goes to interest.
• Each month, the principal portion grows slightly and the interest portion shrinks.
• After 6 payments totaling $9,481.02, only $1,373.51 of principal has been paid off.

The Front-Loaded Interest Problem

Banks calculate interest on the outstanding balance. Since the balance is highest at the beginning, the interest charge is also highest at the beginning. This isn’t a trick or a penalty — it’s the natural result of the math. But the practical effect is that you build equity very slowly in the early years.

Here is how the principal-vs-interest split changes over a 30-year, $250,000 loan at 6.5%:

Year	Cumulative Principal Paid	Cumulative Interest Paid	Remaining Balance
5	$16,468	$78,542	$233,532
10	$39,712	$149,508	$210,288
15	$73,091	$210,929	$176,909
20	$121,254	$256,956	$128,746
25	$190,877	$285,543	$59,123
30	$250,000	$318,861	$0

After 10 years (120 payments totaling $189,620), you have paid off only $39,712 in principal — just 15.9% of the loan. Meanwhile, you have paid $149,508 in interest. The tipping point, where more of each payment goes to principal than interest, doesn’t arrive until around year 18 for this loan.

Extra Payment Strategies

Extra payments go directly toward principal, which reduces the balance that interest is calculated on. Even small additional amounts can save you a shocking amount of money and time.

Strategy 1: Fixed Extra Monthly Payment

Add a consistent extra amount to each monthly payment.

Example: On the $250,000 loan at 6.5%, adding $200/month extra:

• Standard payoff: 30 years, $318,861 total interest
• With $200 extra: 24 years 2 months, $240,428 total interest
• Savings: $78,433 in interest and nearly 6 years off the loan

Strategy 2: One Extra Payment Per Year

Make 13 payments per year instead of 12. One common approach is to divide your monthly payment by 12 and add that fraction to each monthly payment.

Example: $1,580.17 / 12 = $131.68 extra per month.

• Payoff drops from 30 years to approximately 25 years 8 months
• Interest savings: approximately $62,000

Strategy 3: Bi-Weekly Payments

Pay half of your monthly payment every two weeks. Since there are 52 weeks in a year, you make 26 half-payments, which equals 13 full payments per year (one extra payment annually).

• Monthly payment: $1,580.17
• Bi-weekly payment: $790.09
• Same effect as one extra annual payment

Not all lenders support bi-weekly payments directly. Check with your servicer before enrolling, and avoid third-party services that charge fees for this.

Strategy 4: Lump Sum Payments

Apply a bonus, tax refund, or inheritance directly to the principal. Timing matters: a $10,000 lump sum in year 2 saves more than the same amount in year 20 because the interest savings compound over more remaining years.

Example: A $10,000 extra payment in year 2 on the $250,000 loan:

• Saves approximately $28,000 in total interest
• Shortens the loan by about 14 months

The same $10,000 applied in year 20 saves only about $5,000 in interest.

Comparing Loan Terms: 15-Year vs. 30-Year

The 15-year mortgage is the most powerful amortization accelerator. It typically carries a lower interest rate and forces faster principal paydown.

Comparison on a $250,000 loan:

Factor	30-Year at 6.5%	15-Year at 5.9%
Monthly payment	$1,580	$2,098
Total interest	$318,861	$127,639
Interest savings	—	$191,222
Payment difference	—	+$518/month

The 15-year costs $518 more per month but saves $191,222 in interest. If you can comfortably afford the higher payment, the 15-year is the better financial choice. However, the 30-year gives you more flexibility — you can always pay extra on a 30-year, but you can’t reduce payments on a 15-year without refinancing.

Amortization Beyond Mortgages

The same amortization math applies to:

Auto loans: Typically 3-7 year terms. A $35,000 car loan at 7% for 5 years: monthly payment = $693, total interest = $6,574. Making one $2,000 extra payment in year 1 saves about $550 in interest and shortens the loan by 3 months.

Student loans: Federal student loans amortize over 10-25 years depending on the repayment plan. Income-driven plans extend the term but increase total interest paid.

Business loans: SBA loans and commercial mortgages amortize similarly. Some have balloon payments where the amortization schedule is based on 25-30 years, but the remaining balance comes due after 5-10 years.

Personal loans: Typically 2-7 year terms with fixed monthly payments.

Skip the Math

Our Amortization Calculator generates a full payment schedule showing the principal, interest, and balance for every month of your loan. Compare different scenarios by adjusting the rate, term, and extra payments.

Frequently Asked Questions

Can I pay off my mortgage early without a penalty?

Most conventional and government-backed mortgages (FHA, VA) originated after 2014 don’t have prepayment penalties, thanks to the Dodd-Frank Act. However, some commercial loans, jumbo loans, and older mortgages may include prepayment penalties for the first 3-5 years. Check your loan documents under the “prepayment” section, or call your servicer to confirm.

How do I calculate the interest portion of a specific payment?

Multiply the remaining balance by the monthly interest rate. For the first payment on a $250,000 loan at 6.5%: $250,000 x (0.065/12) = $1,354.17. Your monthly payment minus this interest amount equals the principal portion: $1,580.17 - $1,354.17 = $226.00. For any future payment, use the remaining balance after the previous payment.

Is it better to make extra payments or invest the money?

It depends on the interest rate spread. If your mortgage rate is 6.5% and you expect investment returns of 9-10%, investing has a higher expected return. But paying down the mortgage is a guaranteed, risk-free return of 6.5%. Many financial advisors suggest a hybrid approach: max out employer-matched retirement contributions first, then direct extra funds toward debt payoff.

What is negative amortization?

Negative amortization occurs when your payment doesn’t cover the full interest charge. The unpaid interest gets added to the principal balance, which means you owe more over time instead of less. This can happen with payment-option ARMs and some income-driven student loan plans. It is generally considered a dangerous loan structure for borrowers.

How does refinancing affect my amortization schedule?

Refinancing replaces your current loan with a new one. The new amortization schedule starts from scratch. If you refinance a 30-year mortgage after 10 years into a new 30-year mortgage, you reset to 30 years of payments. To come out ahead, the interest rate reduction must save more than the closing costs (typically 2-5% of the loan amount). Calculate your break-even point: closing costs divided by monthly savings equals the number of months before you start benefiting.