Be sure that you really know what to expect to find in your first mortgage statement. Amortization is not a scary word!When my husband and I moved into our first home, we were excited. Our own house! No more crabby landlords or broken plumbing that sat for weeks on end before the repairman could come fix it.

We were still trying to figure out where the heck to put all of our dishes when our first mortgage statement arrived in the mail. I looked at it and I realized that I hadn’t seen it before we signed the mortgage papers. Eager to get the deal done at the time, I had just smiled and nodded my head as we worked with the loan officer to secure our mortgage.


How was this possible? I didn’t understand. I thought that if we paid our $1,098.21 mortgage, that’s how much our loan would be reduced by. Clearly, I should have paid more attention when going through the loan process.

Now I know a lot more about a process called amortization. Don’t let it catch you off-guard, too. Here’s how it works:

How Your Mortgage Payment Is Split Up

Every time you make a mortgage payment, it’s split up into three categories: principal (what goes towards paying off your loan); interest (what goes to the bank for the privilege of using their money); and escrow (a separate account that automatically pays taxes and insurance for you).

My first mortgage payment of $1,098.21 was split up the same way: $251.47 went to the principal, $546.05 went to interest, and $300.69 went to escrow. My first interest payment was more than twice my principal payment!

How Each Percentage Is Calculated


There’s good news, though: over time, the percentage of money going to pay off your loan goes up, while the percentage of money going to interest payments goes down. This process is called amortization. Let’s look at a simple example:

Say that you’ve already put a down payment towards a new house, and you need to take out a 30-year loan for $100,000 at an interest rate of 4.5 percent to pay for the rest. We’ll ignore the escrow amount and focus instead on how this amount is divvied up between principal and interest payments.

If you go by our example here, your monthly payment on your $100,000 loan will be $506.69.

Next, find out your monthly interest rate. Divide 4.5 percent by 12 to get your monthly interest rate of 0.375 percent.

Then multiply the outstanding principal balance (how much you still owe on the loan) by the monthly interest rate to get your actual interest payment. For this example, you’d type into a calculator: $100,000 × 0.00375 = $375. This will be your interest payment.

Your principal payment is calculated next. It’s simply the difference between your monthly payment amount and the interest payment. So, $506.69 – $375 = $131.69. This is how much goes to pay off your loan. Now you owe $99,868.31. This process gets repeated over and over each month until the loan is completely paid off.

How Principal and Interest Payments Change Over the Life of Your Loan

Now that you can see how principal and interest payments are calculated, it’s easy to see how they change over the life of the loan.

Because the interest payment is calculated based on how much you still owe, over time, you’ll pay less and less interest as the amount you still owe goes ever-so-slowly downwards.

For a 30-year loan, this is what your payments will look like at the start, middle, and end:

Payment Monthly Payment Interest Payment Principal Payment
First $506.69 $375.00 $131.69
Middle (180th payment) $506.69 $248.38 $258.31
Last (360th payment) $506.69 $1.89 $504.79

Don’t Let Amortization Catch You by Surprise

Amortization is a double-edged sword: you’ll owe the most interest right at the start of your mortgage, but as you pay it off, your monthly payments will shift so that you’re paying off more principal than interest.

This is why experts suggest staying in your home for a minimum of five years before you move again.

If you sell before that, you might not even have paid off enough of the principal to cover your closing costs. You could end up having to pay to sell your house!

Check with your lender to see how much can you pay over and above the stated monthly payment. By doing so, you will reduce the principal balance even faster and skip over those first few years of heavy-interest payments.

I know I will take that route the next time I buy. I’ll pay less money to the bank (I don’t think those big bankers need any more money), and I’ll own my own home even sooner!