Compare the two amortization systems. Full amortization table plus total interest.
What amortization means
Amortization is the process of paying off a loan through a series of scheduled payments that each include both interest and principal. A loan is "fully amortizing" when the final payment settles the balance exactly, leaving no balloon due at the end.
Understanding amortization matters because the split between interest and principal shifts dramatically over a loan’s life. Early payments are nearly all interest; late payments are nearly all principal. The same $2,000 monthly payment funds very different things in year 1 versus year 29.
The two dominant systems
Most consumer loans worldwide use one of two repayment structures:
- Fixed-payment amortization (French / Price system): equal total payments over life of loan; interest-principal mix shifts gradually
- Declining-payment amortization (Constant amortization / SAC system): fixed principal each period; interest decreases; total payment shrinks over time
Fixed-payment math
The monthly payment for a fixed-payment loan is PMT = P × [r × (1 + r)^n] / [(1 + r)^n − 1], where P is principal, r is the monthly rate, and n is the number of payments.
Example: $300,000 at 6% annual (0.5% monthly) for 30 years (360 payments). PMT = 300,000 × [0.005 × 1.005^360] / [1.005^360 − 1] ≈ $1,798.65. Over 30 years, total paid is $647,515, of which $347,515 is interest — more than the original principal.
Reading an amortization table
An amortization table lists every scheduled payment with columns for payment number, payment amount, interest portion, principal portion, and remaining balance. The pattern reveals the loan’s economics more clearly than the headline rate.
For the $300,000 / 6% / 30-year example: month 1 interest is $1,500, principal only $298.65. By month 180 (halfway through time), principal and interest are roughly equal. By month 360, nearly the entire $1,798.65 is principal. You cross 50% principal repaid around year 20, not year 15.
Extra payments and their impact
Extra principal payments early in a loan’s life produce outsized savings because they eliminate many future interest payments. On the same 30-year $300,000 example, adding $200/month to every payment saves about $92,000 in interest and shortens the loan by 7 years.
The savings curve is front-loaded: extra payments in year 30 save only their own interest. Extra payments in year 1 save interest across all remaining years that principal would have compounded against.
Refinancing decisions
Refinancing replaces an existing loan with a new one, typically to capture a lower rate or restructure the term. The core calculation is whether interest savings exceed closing costs before a reasonable break-even horizon.
Break-even months = closing costs ÷ monthly interest savings. If refinancing a mortgage costs $5,000 and saves $200/month, break-even is 25 months. If you plan to keep the property more than 25 months, refinancing is net positive; less than that, it is not.
Interest rate type caveats
Amortization schedules assume a constant rate. Variable-rate and adjustable-rate loans reset periodically based on a reference index, shifting the schedule at each reset. Always request amortization in two scenarios — current rate and rate-at-cap — to understand the worst case.
Negative amortization loans allow payments smaller than the monthly interest, causing the principal balance to grow. These are rare in consumer markets today and generally unfavorable; if they appear in a proposal, understand them fully before signing.
Founder of UtilizAí, with a background in Blockchain, Cryptocurrencies and Finance in the Digital Era, plus complementary studies in Theology, Philosophy and ongoing coursework in Speech-Language Pathology. Learn more.
Frequently asked questions
Why is most early payment interest?
Interest is calculated each month on the outstanding balance. When the balance is at its highest — at the start of the loan — interest is also at its highest. As principal pays down over time, the interest portion of the fixed payment shrinks and the principal portion grows.
Is a shorter loan always better?
Not always. A 15-year mortgage has higher monthly payments but dramatically less total interest paid. If you can afford the payment without sacrificing emergency savings or retirement contributions, shorter is usually better. If affording it means skipping those, longer-term with extra payments may be more flexible.
Should I make bi-weekly instead of monthly payments?
Bi-weekly payments equivalent to half the monthly amount produce 26 half-payments = 13 full payments per year instead of 12. That extra payment goes entirely to principal and can shave 4–6 years off a 30-year mortgage while saving tens of thousands in interest.
What is the difference between SAC and Price systems?
The Price system uses equal total payments (interest + principal sum constant), while SAC uses equal principal payments (total payment declines). Price systems have lower initial payments but pay more total interest; SAC has higher initial payments but less total interest.
Can I rebuild my amortization schedule after extra payments?
Yes. Most lenders recalculate internally, but you can also redo the math: new balance × [r × (1 + r)^remaining_months] / [(1 + r)^remaining_months − 1] at the same rate shows the new required payment. Some lenders reamortize (lowering payment) while others keep payment constant and shorten term.
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