What Is Amortization?

Short answer

Amortization is paying off a loan with scheduled payments over a set term, where each payment covers that month's interest and reduces the principal. Early on, most of the payment goes to interest (CFPB, checked October 2026). On a $400,000, 30-year loan at 6%, the first payment of about $2,398 puts only about $398 toward principal.

Definition

Paying off a loan over the time and at the rate set in the loan documents. An amortization schedule shows how each payment splits between principal and interest.

Worked example

Example only, not a quote: $400,000 at 6% for 30 years = about $2,398 per month in principal and interest. Month 1: $2,000 interest, $398 principal. After 5 years the balance is about $372,217; after 10 years, about $334,743. Principal does not exceed interest until payment 223, about year 19. Total interest over 30 years: about $463,353.

How it works

Each month, interest = balance x (annual rate / 12). The rest of your fixed payment goes to principal. As the balance falls, interest shrinks and more goes to principal.

• Fully amortizing: the balance reaches $0 at the end of the term
• Interest-only: no principal paid for a period
• Negative amortization: the payment does not cover interest, so the balance grows (CFPB)

Why it matters

Amortization explains why equity builds slowly at first and why extra principal payments early save the most interest. A shorter term, like 15 years, has a higher payment but much less total interest. It also matters when you weigh a refinance: restarting a 30-year clock can lower the payment while adding years of interest. See refinance break-even.

In South Florida

Your full Florida payment also includes property taxes, homeowners and flood insurance, and sometimes HOA dues. Those are not part of amortization; they sit on top of it in your PITI and can change every year.