Amortization is the process of paying off a loan through regular, equal installments over a set period. Each payment covers both interest and principal, but the proportion changes over time — early payments are mostly interest, while later payments are mostly principal.
Example: On a $200,000 mortgage at 6% over 30 years, your monthly payment is $1,199. In month one, $1,000 goes to interest and $199 to principal. By month 300, only $6 goes to interest and $1,193 to principal. The total interest paid over 30 years: a staggering $231,640.
Understanding amortization reveals the true cost of borrowing. A 30-year mortgage at 6% costs more than double the original loan in total interest. This is why financial advisors recommend making extra principal payments early — even small amounts can save tens of thousands of dollars.. A 30-year mortgage at 6% costs more than double the original loan in total interest. This is why financial advisors recommend making extra principal payments early — even small amounts can save tens of thousands of dollars.