How Mortgages Actually Work
Most homeowners know they make a monthly payment, but few understand the "invisible" process of amortization. Amortization is the schedule by which your debt is paid off over time. In the beginning, the majority of your payment goes toward interest. By the end, the majority goes toward the principal.
The Front-Loaded Interest Trap
On a standard 30-year fixed-rate mortgage, the interest is calculated based on the remaining balance. Because the balance is highest at the start of the loan, the interest charge is also at its peak. This is why, in year one, it may feel like your balance is barely moving despite making thousands of dollars in payments.
Example: $400k Loan at 6.5%
In month one, your interest charge is roughly $2,166. If your total payment is $2,528, only $362 is actually reducing your debt. By year 25, those numbers flip, and almost $2,000 of your payment goes to principal.
The Power of Extra Payments
Because interest is calculated on the remaining balance, any extra principal payment you make today has a massive "compounding" effect on future interest savings. Paying just one extra monthly payment per year can shave 5-7 years off a 30-year mortgage and save you over $100,000 in interest.
Conclusion
Understanding your amortization schedule allows you to see the true cost of your home. Use our mortgage calculator to view your full 360-month schedule and see how much you can save by making small additional contributions.