Financial Calculations for Everyday Decisions
Understanding loan payments, compound interest, and basic financial math helps you make better money decisions. Loan amortization means each payment covers some interest and reduces some principal. Early in the loan term, most of each payment goes toward interest. Late in the term, most goes toward principal. This is why refinancing early in a mortgage saves more money, because the remaining balance is higher so more interest is being paid. I did not understand any of this when I signed my first mortgage. The number on the page was just a monthly payment. It took running an actual amortization schedule to see where my money was going, and that changed how I think about every loan since. How Amortization Actually Works On a thirty-year mortgage of 300,000 dollars at 6 percent interest, the monthly payment is about 1,798 dollars. In the first month, the interest portion is 1,500 dollars and the principal portion is only 298 dollars. By year fifteen, the split is roughly equal. By year twenty-five, most of the payment goes to principal. This front-loading of interest is why early extra payments are so powerful. Every dollar of principal paid off early eliminates all future interest that would have accrued on that dollar.