Amortization is the process of spreading a loan into a series of fixed payments over time. Each payment consists of two parts: interest charged on the remaining balance and a portion that reduces the principal. In the early years of a loan, the interest portion is much larger than the principal portion because the outstanding balance is still high.

As you make payments and the balance decreases, less interest accrues each month and a larger share of each payment goes toward the principal. This is why a 30-year mortgage borrower who has been paying for 10 years may have barely reduced the principal by a third, even though they have made 120 payments. Understanding this schedule helps you see the true cost of borrowing and the value of extra payments.

Making extra payments directly reduces the principal balance, which means less interest accrues in future months. Even modest extra payments can shave years off a mortgage and save tens of thousands of dollars in interest. When making extra payments, always confirm with your lender that the additional amount is applied to the principal rather than being held as a prepayment of future installments.