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Mortgages & financing

Amortization

Also called loan amortization, amortization schedule

In short

Amortization is the process of paying off a loan with regular, fixed payments over time. Early payments go mostly to interest; later payments go mostly to principal.

Payment
Fixed for fixed-rate loans
Early years
Mostly interest
Later years
Mostly principal
Shown in
An amortization schedule

How amortization works

Each month, interest is charged on the remaining balance. Your fixed payment covers that interest first, and the rest reduces principal. As the balance shrinks, less goes to interest and more to principal, so equity builds faster later in the loan.

The standard payment formula is M = P × r(1 + r)^n ÷ ((1 + r)^n - 1), where P is the loan amount, r is the monthly rate and n is the number of payments.

Shorter terms and extra payments

A 15-year loan has higher payments than a 30-year loan but much less total interest. Extra principal payments shorten the loan and cut interest, as long as your loan has no prepayment penalty.

Loans that don't fully amortize

Interest-only loans, common with hard money, don't reduce principal. Balloon loans require a large lump sum at the end. With negative amortization, the balance grows; avoid loans built that way unless you fully understand them.

The formula

Monthly principal and interest
M = P × r(1 + r)ⁿ(1 + r)ⁿ − 1
M
Monthly payment of principal and interest
P
Loan amount
r
Monthly interest rate (annual rate ÷ 12)
n
Number of monthly payments (years × 12)
Try it in the Mortgage Calculator →
Example

First and last payments on a 30-year loan

On a $300,000, 30-year fixed loan at 6.5%, the payment is about $1,896. In month one, interest is $300,000 × 0.065 ÷ 12 = $1,625, so only $271 goes to principal. By the final years, nearly all of each payment goes to principal.

Amortization vs. PITI

Amortization

Amortization is the process of paying off a loan with regular, fixed payments over time. Early payments go mostly to interest; later payments go mostly to principal.

PITI

PITI stands for principal, interest, taxes and insurance, the four parts of a typical monthly mortgage payment. Lenders use it to judge whether a borrower can afford a home.

The differenceAmortization covers how principal and interest are paid down; PITI is the full monthly payment, adding taxes and insurance.

Frequently Asked Questions

Related terms

MortgageMortgages & financingA mortgage is a loan used to buy real estate, secured by the property itself. If the borrower stops paying, the lender can take the property through foreclosure to recover what is owed.Home EquityMortgages & financingHome equity is the portion of a property you own outright: its current market value minus everything owed on it. It grows as you pay down the loan and as the home's value rises.RefinanceMortgages & financingTo refinance is to replace an existing mortgage with a new one, usually to get a lower rate, change the loan term, or take cash out of the home's equity.Loan ModificationForeclosure processA loan modification is a permanent change to a mortgage's terms, such as a lower rate, longer term or added past-due amounts, that a lender agrees to so a struggling borrower can afford payments.Private Mortgage Insurance (PMI)Mortgages & financingPrivate mortgage insurance (PMI) protects the lender, not the borrower, if a borrower defaults on a conventional loan. It is usually required when the down payment is less than 20% of the home's value.Debt-to-Income Ratio (DTI)Mortgages & financingDebt-to-income ratio (DTI) is the share of your gross monthly income that goes to debt payments. Lenders use it to decide how large a mortgage payment you can afford.Loan-to-Value Ratio (LTV)Mortgages & financingLoan-to-value ratio (LTV) compares the size of a mortgage with the property's value. A lower LTV means more equity and less risk for the lender, which often brings better loan terms.Hard Money LoanMortgages & financingA hard money loan is a short-term loan from a private lender, secured mainly by the property's value rather than the borrower's income. Investors use it to buy and renovate properties quickly.

Learn more in the knowledge base

How Much House Can You Afford?Guide · 6 min readThe right price is the one you can pay every month without strain and still keep savings for repairs and emergencies. This guide shows how lenders measure affordability, what they leave out, and how to build a budget that works for you.How to Get Pre-Approved for a MortgageGuide · 7 min readA pre-approval tells you, and the sellers you make offers to, how much a lender is prepared to lend after checking your income, assets and credit. This guide explains how it differs from pre-qualification, what to gather, how to compare lenders and what can change the answer before closing.Check Your Finances Before You Buy: Credit, Debt and Cash ReservesGuide · 7 min readYour credit, debts and savings decide which loans you can get, how much you can offer and how much room you have for surprises. Checking them before you shop gives you time to fix problems. This guide covers credit reports, debt-to-income, cash to close and the extra reserves distressed properties call for.
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Disclaimer: The information on this page is for general educational purposes only and is not legal, financial, tax or investment advice. Laws, lending rules and market conditions vary by state and change over time, and any figures shown are estimates. Before you buy, sell, finance or bid on a property, consult a qualified attorney, financial advisor, lender or licensed real estate professional about your situation.